"The Fed Has Gone Crazy!"

[cherrypoptart]

I almost put this into the Trump lies category but didn't want to step on any more feet. Is the Fed going crazy? There is a chart in the story indicating that the rates were abnormally low for an abnormally long time under Obama. It's seems like these rate hikes are putting things back to what might be considered normal, but I'll admit I don't know much about it. I do like learning from all of y'all though so hope there are some insights. Too bad Kuato isn't around since I remember this type of thing being right in her wheelhouse and we see a bit how it's affecting the stock market but I also wonder what it's going to do to bonds. People investing in bonds know about laddering them to spread the interest rate risk, meaning you don't put all your money into 30 year bonds but buy them so they are expiring every few years or so that way if rates rise you'll be able to ... well I'm sure I don't have to explain it to y'all. The thing that I do wonder about is if let's say you have bonds expiring is it entirely possible that you'd be best off just holding that money as cash for a year or more and get no interest (or very little in a short term cd) on it so you can buy your bonds at a higher interest rate later? Or is it best to just keep laddering them and buying them as the old ones expire? I suppose that all depends on whether or not the rates will keep going up and how much.

Anyway, is Trump right that the Fed has gone crazy? Or is he lying again? Or somewhere in between?




https://www.marketwatch.com/story/trump-says-the-fed-has-gone-crazy-after-the-dow-tumbles-830-points-in-one-day-2018-10-10?siteid=yhoof2&yptr=yahoo

https://www.yahoo.com/finance/m/388ed64e-5cbb-3a64-9c67-8a430b29922e/trump-says-the-fed-has-%E2%80%98gone.html#mycomments

[yossarian22c]

Anyway, is Trump right that the Fed has gone crazy? Or is he lying again? Or somewhere in between?

Objectively lying. But clearly demonstrating what Trump actually believes is impossible.

They Fed hasn't gone crazy. Unemployment is low (good thing). Inflation is rising so the Fed policy reaction is to raise rates back to a more normal level. Inflation is rising faster b/c of Trump's trade wars/policy. So the fed is correct to continue with what they have been announcing for years now, that as inflation gets back to their 2% target that they will continue to gradually raise interest rates.

[Fenring]

Objectively lying. But clearly demonstrating what Trump actually believes is impossible.

Saying he's objectively lying is like saying that it's an established fact that raising interest rates is good for the economy. I don't see a clear argument that this is trivially obvious, although I know some of the reasons why it might be good. *Might be*. Only time ever tells with these things, and in general what history shows is that playing with interest rates is just a big science experiment, minus the science.

[yossarian22c]

Objectively lying. But clearly demonstrating what Trump actually believes is impossible.

Saying he's objectively lying is like saying that it's an established fact that raising interest rates is good for the economy. I don't see a clear argument that this is trivially obvious, although I know some of the reasons why it might be good. *Might be*. Only time ever tells with these things, and in general what history shows is that playing with interest rates is just a big science experiment, minus the science.

He didn't say that the Fed was raising interest rates at the wrong time. He is claiming the Fed is crazy for implementing what is considered a very standard monetary policy response to low unemployment and rising inflation. Crazy is the word that clearly makes it a lie. He isn't making an economic argument for why now isn't the right time - he is making the claim that they are mentally unstable for pursuing standard policy (and the policy they have been saying for years they will pursue when inflation starts to rise).

[TheDrake]

Trump never met a dollar he didn't want to borrow, so of course he loves low interest rates. One of the reasons why a President is supposed to step away from business ownership. Is he saying this to help his business, or the country? People who are actually trying to save money, on the other hand, will welcome some rising rates. Remember when you would buy an 18 month certificate of deposit? It's back, baby. People can now get 2.5% at zero risk, compared to the last few years when it was below 1%.

In addition, the federal government in a bipartisan way loves to spend money we don't have, and US Treasuries are going to make borrowing more expense on the national debt. Over two years, 10 year Treasuries are up from 1.5 to near 3%, and short term Tbills popped from 0% to 1.5%.

[D.W.]

Savings and Checking accounts capable of offsetting ATM withdrawal fees with interest earned would be a novel experience...

[Seriati]

The Fed is crazy.

It's no surprise Trump would believe so.  As President he's being judge on the growth rate of the economy.  There's some famous quotes about whether 4% growth is sustainable, or whether we have to accept the new normal.  The Feds' actions are specifically targeted at slowing growth, which partisan's will hold him to account for.

Given that real wages are rising, and many of us would like to keep that trend going, it's perfectly reasonable to view the Fed's decision to try and force growth to slow as premature.  The Fed views both low unemployment and wage growth as dangerous so it's taking action to slow our growth rate to create more unemployment and keep wages down.  Effectively, they are acting to undue the market push to raise actual wages.

Personally, I think the Fed's action is a direct vindication of the economy's success.  The Fed gave us free money for virtually the entire Obama presidency and it couldn't generate growth against the job killing mandates, now they are going all out to try and slow it down.

Honestly, the Fed is paranoid about inflation, but inflation is directly tied to economic and wage growth.  The Fed's on the side of killing the later to slow the former.

[TheDrake]

The fed started moving interest rates back toward normal at the end of 2015, because the recovery began independently of a change in administration.

Savings should be rewarded, and all income investments will rise with the fed, including muni & corp bonds.

Rising wages accomplish nothing but inflation when it happens across the board. Imagine that tomorrow everybody's wages double. Wow that's pretty cool! Until companies have to raise prices to maintain their margins. Not cool. A guy flipping burgers today shouldn't make any more real wages than the guy who did it in the 1950s. Same job, same effort, same skill, same pay. Anything else is an aberration.

Inflation does have a scary feedback momentum, it was a killer in the 70s.

The idea that the “Phillips curve” represented a longer-term trade-off between unemployment, which was very damaging to economic well-being, and inflation, which was sometimes thought of as more of an inconvenience, was an attractive assumption for policymakers who hoped to forcefully pursue the dictates of the Employment Act.2  But the stability of the Phillips curve was a fateful assumption, one that economists Edmund Phelps (1967) and Milton Friedman (1968) warned against. Said Phelps “f the statical ‘optimum’ is chosen, it is reasonable to suppose that the participants in product and labour markets will learn to expect inflation…and that, as a consequence of their rational, anticipatory behaviour, the Phillips Curve will gradually shift upward...” (Phelps 1967; Friedman 1968). In other words, the trade-off between lower unemployment and more inflation that policymakers may have wanted to pursue would likely be a false bargain, requiring ever higher inflation to maintain

So the crazy thing is that Trump wants to make America 1980 again.

2015 article

rate hikes are good for seniors

federal reserve essay on inflation

[Seriati]

The fed started moving interest rates back toward normal at the end of 2015, because the recovery began independently of a change in administration.

Sure it did.  https://fred.stlouisfed.org/series/FEDFUNDS

You can track it by date.  Prior to the election (Nov 16) it had spent the entire 8 years pretty much flat.  There was a slight bump up during the campaign season, but still flat.  Whereas, immediately after the election, and the implementation of pro growth policies, it started a directly upwards trend.

Rising wages accomplish nothing but inflation when it happens across the board. Imagine that tomorrow everybody's wages double.

That's the impact of raising the minimum wage, or handing out free money.  Wages that are a response to growth aren't for dollar for dollar on that point.  However, there's no way to unlink wages from inflation.  Products that include wage costs by necessity must increase in price when wages do so.  But a 10% wage increase, may be accounted for a 1% price increase (depending on the relative value of other inputs).

[TheDrake]

Good points. Yes, wages get a lot more complicated because each sector and job skill grow at different rates. Scarcity in healthcare services can raise wages and salaries there, while leaving things the same otherwise. The closer you push to full employment, the more you start to have shortfalls in high demand areas. Like the bidding war during the bubble for engineers and they were handing out five figure signing bonuses to get people in the door and fuel growth.

There are also lots of jobs where salaries are even less impactful on product price. SG&A, R&D, etc.

But wage growth is an inflation driver, if you look at CPI vs wage growth.

[Seriati]

I'm not denying wage growth is an inflation driver.  My point is that wage growth has lagged the economy for a long time.  http://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/

A little bit of catch up now would be a good thing.  I was reading just last week that wage growth in the poorest workers has been faster than in middle or upper class workers.  I view the Fed's actions as directly trying to stop that.  This isn't the article I was reading, but it was easier to find.  https://www.usatoday.com/story/money/economy/2018/07/05/us-wage-growth-in-june-was-2018s-strongest-so-far/36579285/

The best case argument for what they are trying to do is here.  Where the real growth is shown to be hampered by inflation.  https://www.forbes.com/sites/eriksherman/2018/09/09/as-some-cheer-wage-growth-rate-median-income-is-only-up-by-5-1-since-2006/#744332e265dc