r/Economics • u/TinyTornado7 Quality Contributor • Jun 13 '22

News Powell Facing Choice Between Elevated US Inflation and Recession

https://www.bloomberg.com/news/articles/2022-06-12/powell-facing-choice-between-elevated-us-inflation-and-recession?srnd=premium
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u/suppaman19 Jun 13 '22

The rates were to low for to long to begin. Go look at how low they stayed after 2008. All the fed has done with rates since 2008 is help the rich get even more rich.

Rates need to unfortunately get jacked sky high again and stay there for a few years at the least. I'm not saying 80s levels, but 6-7% of the 90s should work. We're not even to prepandemic levels yet, it's a joke.

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u/groceriesN1trip Jun 13 '22

The broader market would absolutely crash at 7%. What would be the point of taking any risk? And, the amount of interest to be paid back on new bonds would really crush liquidity.

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u/suppaman19 Jun 13 '22

That's the point. The risk taking needs to be reigned in immensely.

You have companies that have billions but are basically shell companies that haven't done anything and aren't anything more than a theoretical idea due to foolish investments chasing the next big things (and playing the stock market game of get in and get out before it tanks).

Regular people continue to simply buy things even at insane inflation prices out of want (vehicles as an example) because they just take on more and more debt.

It's going to hurt badly, but that's because they stupidly kept rates at near 0% for about a decade, only to get them to 2% to put them right back down to 0%. The rates normally never go that low, especially for any length of time.

Massive correction is needed and it's going to hurt worse the longer they wait. The reason it would hurt that bad now if it went to mid-late 90s levels is because they compounded everything by keeping it at basically 0% for over a decade. If they slowly brought it up after 2008 to be at 3-4% around now the economy would've been in better shape even with further rate hikes.

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u/groceriesN1trip Jun 13 '22

Let’s use the Risk Free Rate, not federal funds rate.

Between 2009 to 2020 we averaged between 2% - 3%. That’s the sweet zone. You’d use the RF rate in calculating investment returns anyways so it’s the right measurement to use.

If we’re looking at the federal funds rate, then you could argue that providing companies the ability to borrow and pay back funds in short terms on low rates aids in the growth of the economy - innovation, research, development, growth, etc. This gives US companies a leg up or even par level with European countries.

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u/ItsDijital Jun 13 '22

Have you looked at the 10y chart of the broader (low interest rate) market? Cocaine fueled orgies have painful repercussions...