Fed increases target rate to 3.75-4.00% • Hacker News Board

Re: Fed increases target rate to 3.75-4.00%

#181

Post by bryanlarsen » Thu, Nov 03, 2022, 5:04 PM UTC

lamontcg wrote: post #180

bryanlarsen wrote: post #179

Earlier quoted context omitted.

We are also pretty early into the cycle to declare that a recession is inevitable. Yet that's what a lot of people are saying. The only thing that can be said with certainty is that the future is risky and unclear. IOW, situation normal, all f^#$ed up. It's not the election, it's Black Friday that will be the bellweather, I think. If inflation is still ongoing, discounts will be minimal. If the economy is going south…

The Fed is doing 0.75bp rate hikes every meeting and talking affectionately about Paul Volker. And Powell was pretty clearly saying that rates are going to go higher and stay higher longer than the market expects. We're going to have a recession. This Black Friday is unlikely to be any kind of bellweather. It normally takes 6-12 months after rate hikes stop for them to be felt in the broader market. Next Black Friday…

Keep pushing out those goalposts. People on HN last spring were confident we'd be in a recession by now. Now you're saying that it's 6-12 months away? If you keep pushing those goalposts eventually you will be right. There will be a recession some time in the future.

Re: Fed increases target rate to 3.75-4.00%

#182

Post by georgeecollins » Thu, Nov 03, 2022, 7:27 PM UTC

apropos_g wrote: post #124

georgeecollins wrote: post #78

Earlier quoted context omitted.

That's not quite right, because if you only reduce demand you could also reduce supply and prices would be unchanged. Higher interest rates reduces money supply (which can induce a recession) but does not necessarily reduce the supply of goods. Less money chasing the same amount of goods (ideally) causes lower prices. I don't think you are wrong intuitively. I am just trying to be a little more specific because get v…

> but does not necessarily reduce the supply of goods Every mainstream economist agrees that rising interest rates increases unemployment. Well you need human beings to go and make stuff like food and gas. That stuff is also already made as efficiently as possible. So supply is definitely, also, going to be reduced.

I think you are right, but keep in mind we are currently in the middle of raising interest rates and unemployment has not gone up. So what I am trying to say is, rather than say A (rising interest rates) -> D (recession), acknowledge what happens is A (rising interest rates) -> B (less money supply) -> C (less employment) -> D (recession)

Because if you don't acknowledge the steps, you can't explain what is happening today. Rates are going up and unemployment isn't. The economy is complicated.

Re: Fed increases target rate to 3.75-4.00%

#183

Post by rsj_hn » Thu, Nov 03, 2022, 7:40 PM UTC

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.)

There are several mechanisms:

1. choice: The idea is that you can put your money in the bank and get some interest or you can spend it. So when interest rates go up, people will chose to spend less and save more. Obviously rates have to be higher than inflation which is now 10%, for this strategy to work, but at high enough rates, they will choose to save rather then spend. Less spending, demand falls, so prices should drop.

2. money supply: For the non-financial sector of the economy, money is created when households borrow from banks, and money is destroyed when loans are repaid. Increasing interest rates reduces loan growth and thus the money supply. A smaller money supply should lead to lower prices.

3. business investment: higher interest rates means that the cost of capital to firms goes up. They must earn a higher margin in order to service whatever debt they have at the higher rates, and investors can choose to invest in the business or buy a bond, and so the business has to earn a return at least as high as the bond. So higher interest rates means that ventures which would have been profitable at a lower rate are no longer profitable. So less business investment at higher rates.