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Fed increases target rate to 3.75-4.00%

federalreserve.gov

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Re: Fed increases target rate to 3.75-4.00%

#161

Post by whimsicalism »

guyzero wrote: post #159
whimsicalism wrote: post #85

Earlier quoted context omitted.

Of course it depends on the market but many of these "shortages" are only relative to record-high consumer demand for durable goods. Yes, during periods of extremely high demand relative to current supply, profit for suppliers increases. This encourages new entrants to the market who can help boost supply. This is just the basic functioning of the economy and price signals in action. If producing things in short supp…

Gas prices are significantly higher than 2019, total vehicle miles travelled are about the same ( https://fred.stlouisfed.org/series/M12MTVUSM227NFWA ) so there must be a reduction in supply or just straight price gouging to justify the price increase.

There are both supply shocks and demand shocks. Gas prices are definitely undergoing a supply shock right now, which contributes to the price increases (and which the Fed can't help.) But there are also broad-based demand increases.

Re: Fed increases target rate to 3.75-4.00%

#162

Post by tick_tock_tick »

apropos_g wrote: post #128
yongjik wrote: post #122

Earlier quoted context omitted.

Oh, but people will stop buying so much food and gas, just not directly. Without enough money, some people will cancel their planned trip to Hawaii. That's a lot of gas not burning right there. Or they won't buy another TV, which needs gas to be delivered to your home. With less people competing for precious gas, its prices drop.

> Without enough money, some people will cancel their planned trip to Hawaii. By this logic, why doesn't Congress illegalize travel? Is that going to reduce the cost of travel? Will that reduce CPI, which measures prices, not demand? > Or they won't buy another TV, What if we illegalized buying TVs? Would that make TV prices fall? You think that is going to reduce CPI? I'm not saying your explanation here is stupid.…

> By this logic, why doesn't Congress illegalize travel?

Because then the money just gets spent in other places shifting around the inflation.

Re: Fed increases target rate to 3.75-4.00%

#163

Post by avmich »

apropos_g wrote: post #109
avmich wrote: post #13

Earlier quoted context omitted.

The idea is that people will cut spending somewhat to have more money stored in saving accounts where they produce more low-risk return. Cutting spending will dampen prices. Increasing interest rates increases the temptation to lend money instead of spending.

> is that people will cut spending somewhat Why would people cut spending on food and gas? They need both to survive. That's what the CPI is made of.

Because people will cut spending on going to theaters somewhat, and that takes some gas to get there. No, short term people don't need theaters to survive.

There is some non-critical spending to cut, Feds rely on that.

Re: Fed increases target rate to 3.75-4.00%

#164

Post by lamontcg »

bryanlarsen wrote: post #156
lamontcg wrote: post #150

Earlier quoted context omitted.

Economists have predicted "soft landings" before every recession I can remember where I've followed what the Fed has been saying (I don't quite remember the Volker Fed, I was a little too preoccupied with Star Wars toys and Legos).

And economists have predicted 9 of the last 5 recessions. And in an economy with 3.5% unemployment, the odds of a recession seem pretty low in my opinion.

Once the effects of the Fed rates hikes are felt broadly throughout the economy and unemployment is running closer to 8% let me know if that feels more like a recession or not.

Re: Fed increases target rate to 3.75-4.00%

#165

Post by corny »

apropos_g wrote: post #4

"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. (This should be the new Deleuze meme.)

Both groceries and gas are sold at low profit margins - I've heard as low as 1-2% for groceries. They are commodities, there's a lot of competition, and shoppers are very price conscious. If grocery stores can make a profit selling food cheaper they will. If grocery stores can pay less rent for their stores, pay less wages for their staff, pay less for all their expenses, those savings will get passed down to consumers as cheaper food.

Re: Fed increases target rate to 3.75-4.00%

#166

Post by trs8080 »

corny wrote: post #165
apropos_g wrote: post #4

"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. (This should be the new Deleuze meme.)

Both groceries and gas are sold at low profit margins - I've heard as low as 1-2% for groceries. They are commodities, there's a lot of competition, and shoppers are very price conscious. If grocery stores can make a profit selling food cheaper they will. If grocery stores can pay less rent for their stores, pay less wages for their staff, pay less for all their expenses, those savings will get passed down to consume…

I mean, when was the last time a company the size of a grocery store chain passed down savings to consumers? If anything, the pandemic has shown that companies will gladly continue to fleece customers despite lowering expenses. At the end of the day, they exist to extract as much profit as possible - if every one of their peers maintains high prices, consumers don't have any choice but to pay those prices.

Re: Fed increases target rate to 3.75-4.00%

#167

Post by guyzero »

whimsicalism wrote: post #161
guyzero wrote: post #159

Earlier quoted context omitted.

Gas prices are significantly higher than 2019, total vehicle miles travelled are about the same ( https://fred.stlouisfed.org/series/M12MTVUSM227NFWA ) so there must be a reduction in supply or just straight price gouging to justify the price increase.

There are both supply shocks and demand shocks. Gas prices are definitely undergoing a supply shock right now, which contributes to the price increases (and which the Fed can't help.) But there are also broad-based demand increases.

I agree with your first statement but per the data on aggregate miles travelled I disagree there's actually a demand increase. Ultimately the Fed can't control either supply or demand directly but they try to indirectly control demand by increasing the cost of borrowing. Will it work? Consult your magic 8 ball.

Re: Fed increases target rate to 3.75-4.00%

#168

Post by whimsicalism »

guyzero wrote: post #167
whimsicalism wrote: post #161

Earlier quoted context omitted.

There are both supply shocks and demand shocks. Gas prices are definitely undergoing a supply shock right now, which contributes to the price increases (and which the Fed can't help.) But there are also broad-based demand increases.

I agree with your first statement but per the data on aggregate miles travelled I disagree there's actually a demand increase. Ultimately the Fed can't control either supply or demand directly but they try to indirectly control demand by increasing the cost of borrowing. Will it work? Consult your magic 8 ball.

My statement about demand and supply shock is about the broader economy. Gas price is not the only indicator or driver of inflation.

In the case of gas, supply issues predominate, although it is worth noting that price of gas going up and number of miles staying the same indicates both supply and demand shocks at the same time.

The Fed has almost perfect control of aggregate demand. Inflation is more challenging because it bakes in expectations.

Re: Fed increases target rate to 3.75-4.00%

#169

Post by za3faran »

prottog wrote: post #26
apropos_g wrote: post #4

"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. (This should be the new Deleuze meme.)

The Fed's tools are very blunt, and the only way it can reduce at-the-register prices for things like food and gas are indeed by hammering down aggregate demand, i.e. inducing a recession. Of course, whatever the Fed does may be counterbalanced by supply-side issues, whether economic or political; a warmer-than-expected winter moderating gas prices, or executive actions impeding investment into O&G raising prices, an…

What's the guarantee that inducing a recession would be recoverable at some point in the future?

Re: Fed increases target rate to 3.75-4.00%

#170

Post by klipklop »

bryanlarsen wrote: post #156
lamontcg wrote: post #150

Earlier quoted context omitted.

Economists have predicted "soft landings" before every recession I can remember where I've followed what the Fed has been saying (I don't quite remember the Volker Fed, I was a little too preoccupied with Star Wars toys and Legos).

And economists have predicted 9 of the last 5 recessions. And in an economy with 3.5% unemployment, the odds of a recession seem pretty low in my opinion.

We are pretty early into the cycle to declare such a thing. The rate increases are likely not close to ending. It takes time for this stuff to unwind.

Also note that we are in a similar situation as when Nixon propped up the economy before an election in 1972. It took a while for his policies to backfire. Unemployment rate was 3.5% when Nixon was elected and doubled by 1974.

The current dominating party in the US is not taking as many extreme measures as Nixon of course, but for me I want to see where the economy stands after the election dust has settled.

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