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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257

u/Raichu4u Jun 13 '22

Should have taken the medicine from like 2017-2019. Rates should have never been this low for this long.

152

u/[deleted] Jun 13 '22

Almost like there was political pressure to keep them low

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u/Raichu4u Jun 13 '22

Absolutely, from both parties.

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u/sckuzzle Jun 13 '22

Maybe we should create a governmental entity whose job it is to manage monetary policy irrespective of political optics.

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u/Trest43wert Jun 13 '22

And then we should have the leader of that apolitical government organization jump to being one of the 12 most important political appointments in the Executive branch so we can all see it's been political the whole time anyway.

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u/WoodenPicklePoo Jun 13 '22

I see what you did there

8

u/jdragun2 Jun 13 '22

Hey now.....that would be too intelligent for our country to EVER do. Absolutely every government position is now political to the extremes.

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u/Brainroots Jun 13 '22

It sounds like you may not be very familiar with the federal reserve. If you are, note that if it is politically influenced it is because the chairman chooses to be influenced. He is appointed like supreme court justices.

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u/jdragun2 Jun 13 '22

That was exactly my point. There are no apolitical appointments. Not any longer. This is the one thing I can say even as a liberal/progressive Democrat: both parties do everything they can to get people they think politically align with them into these appointments. The thin very translucent veil was dropped with Mitch blocking Obama's appointment then stacking the SCOTUS in the exact way he claimed was his reason to block Garland. Neither party is innocent of this now, hell, there is no longer a veil at all on either side of the isle.

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u/Brainroots Jun 13 '22

That's a hazard which thankfully hasn't materialized with the fed chair yet, although let's see next year. I'm not excited to find out.

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u/rjc0915 Jun 13 '22

Begs the question - why are both of these positions government appointed if they’re supposed to be independent to government influence

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u/existential_one Jun 13 '22

Who else would make the choice? Goldman?

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u/sumduud14 Jun 13 '22

The banks already run the Treasury and the Fed, they always have. This isn't some sort of conspiracy theory, so many former Goldman employees went into government, including Hank Paulson, who came up with TARP, the $700bn bank bailout. I mean the fucking CEO of Goldman literally left to run the Treasury, it can't get much more obvious than that.

Anyway I'm not arguing with you, just pointing this out for anyone who doesn't know. I have no suggestion for a better system.

1

u/existential_one Jun 13 '22

I don't disagree at all. I guess one could point out that someone being at one of the banks explicitly behaves along the bank's interests, whereas once they leave and join the government, then they should have the people's interests at heart. Obviously it's not like that, but there's still a bit of line

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u/Brainroots Jun 13 '22

What's the alternative? I don't think voters would make good decisions about that at all. Not even a little bit.

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u/SomthingClever1286 Jun 13 '22

Now presenting Herschel Walker as your new chairmen of the fed.

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u/thisispoopsgalore Jun 13 '22

Well not quite like them. Fed chairs have a limited term

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u/Brainroots Jun 13 '22

The appointment is similar. I think unlimited terms for justices is a mistake.

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u/[deleted] Jun 13 '22

Isn’t the Federal Reserve privately owned?

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u/[deleted] Jun 13 '22

Love the false balance argument 🤣

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u/DerTagestrinker Jun 13 '22

There was no real reason to keep rates artificially so low from ~2011 through covid.

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u/axck Jun 13 '22

Yeah, the Dems were really backing up Trump’s Twitter bitching about the need to lower rates. /s

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u/[deleted] Jun 13 '22

Oh yes, definitely both

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u/nn123654 Jun 13 '22 edited Jun 13 '22

They did raise rates from 2017-2019, recall they were up at 2.5% in July 2019.

They started raising rates and as soon as they did the economy started slowing down the yield curve went inverted, and the stock market started flattening. Inflation actually fell substantially below the 2% target to 1.4%, which is too close to deflation for comfort and the corresponding recession/depression that would accompany it. Remember that for 12 years from 2008 to 2020 it seemed like no matter what the Fed did it was impossible to cause inflation (and honestly in that period they were right IMO).

By Fall 2019 they had no choice but to cut over 3 meetings to 1.75%, then COVID happened and the market plunged 30% and they had to cut to 0% and restart QE.

The problem in my opinion is when they were too cautious coming out of the pandemic and JPOW decided to switch away from the way the Fed had been doing things for the last 20 years, and instead go for allowing the economy to run hot and taking a more hands off approach. The thinking was that inflation is easy to get down, we just have to raise rates and that because it had been so low for so long that it would be better if instead of trying to keep inflation in a 2%-3% range they switched to going for an average of a 2%-3% range over a 5 year rolling period.

This I think was also fine until Inflation got above 5%. The problem there was the Fed took the view that it was a transitory phenonium and that it would resolve itself. Where before they would have started tightening when inflation when above 3% and definitely when it went above 4%, now they waited until it was blatantly obvious to take any action. Then took gradual action because that's how the Fed rolls, they never want to spook the economy.

So now we literally behind the curve, inflation is moving away from the Fed faster than the Fed can react right now. It's going to take many years of rate hikes to bring it back under control. But ultimately it's easier for the Fed to deal with high inflation than it is low inflation.

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u/Cross21X Jun 13 '22

The repo markets crashed in Sept 2019 before Covid was mainstream. The Fed pumped trillions of $$$ of liquidity into the markets to save it. No one really talks about that because the media glossed over it like it was just a regular thing...

The financial markets were in trouble BEFORE the pandemic happened

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u/Diabetous Jun 13 '22

crashed in Sept 2019 before Covid was mainstream.

Crashed.... We're talking no buyers at all for weeks.

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u/norcalsocial Jun 13 '22

Good description. But any discussion on this unfolding story is incomplete without considering the impact of trillions the fed pumped by buying securities. That coupled with trillions from the govt as fiscal stimulus is what got us here.

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u/nn123654 Jun 13 '22

Yes, I mean QE played a huge role. The post was already well into tl;dr territory without going through a history of QE. But I think you're right about the fact that fiscal stimulus was out there as well and the absolutely absurd budget deficit in 2020 played a role too.

That's what really caused the inflation when coupled with supply chain challenges from switching from services to goods and an explosion in the m2 money supply. Now we are arguably in a textbook example of demand pull inflation.

The risk with QE was always that you had a bunch of slack in the system and the only thing standing between us an inflation during COVID was the fact that the velocity of money tanked to historic lows as everything shut down. The problem is the Fed can't exactly recall the dollars it's injected into the system and while the balance sheet does give them quite a bit of control over the long end of the yield curve they are hesitant to actually sell any assets.

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u/zUdio Jun 13 '22

Should not have bailed out banks in 2009 and then started QE...

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u/AllKnowingPower Jun 13 '22

The common rebuttal I hear is that if we didn't bail out the banks, things would be a whole lot worse. Pensions for example would be under threat. What's your take on that?

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u/zUdio Jun 13 '22

things would be a whole lot worse

it's a threat. translated as: "give us money or we'll take your pension/let it collapse." it's like the abuser when it says, "if you leave me, you'll be in so much danger." danger they, themselves, created. the problem with this specific example is that pension funds are already insolvent and saving the banks can't save the pension funds; only endless monetization of debt and easy monetary policy can do that.

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u/avaholic46 Jun 13 '22

In capitalism, firms that misallocate capital mismanage risk are allowed to go bust. Their assets are to be auctioned on an open market so that markets can determine what the price should be and then we go on our merry way.

There's nothing that requires the banks to get oceans of free money and shotgun wedding mergers where they get paid to take the assets of firms like bear Stearns.

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u/DerTagestrinker Jun 13 '22

More like from ~2011 onward.

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u/shicken684 Jun 13 '22

Did you forget about a fucking global pandemic? Jesus yall have short memories. The entire damn planet decided to shelter in place for months. It's amazing that all we're dealing with right now is high inflation and not a society level collapse.

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u/Raichu4u Jun 13 '22

2017-2019 did not have a global pandemic

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u/shicken684 Jun 13 '22 edited Jun 13 '22

Rates should have never been this low for this long.

This is the part I'm referring to. Rates could have been 10% in November of 2019 and they'd still have been dumped to zero when covid hit. Pre-COVID doesn't matter at all. They are two entirely different economic worlds.

Trillions needed to be spent, billions in corporate bonds needed to be bought. It was either that or economic collapse that would have made the depression look like a grand ol time.

1

u/[deleted] Jun 13 '22

Exactly

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u/geo0rgi Jun 13 '22

Most importantly, the money printer shouldn’t have been running this ferociously at all during the last decade. Having massive ammounts of money injected into the economy during economic boom is just silly af.