Fed Now Says It Should Have Acted Sooner on Inflation

[Dtail]

The yield curve is now inverted. 5 year yield is higher than 30 year yield. Not sure what it means but I have been conditioned to be concerned about that.

As you know, even though the borrowing is not based on the 2/10 spread, that is still the referred spread for recession fears.
Who knows, but perhaps some of us lock in some higher short term yields.

 

[ncbill]

As for recession risk, remember historically some nasty ones have followed "oil shocks" like we're now experiencing.

 

[Koolau]

As for recession risk, remember historically some nasty ones have followed "oil shocks" like we're now experiencing.

Yeah, everything points to recession IMHO (and I know nothing so YMMV.)

 

[Ready-4-ER-at-14]

When ever inflation control is mentioned a whole lot of ideas and terms arise. I read the stuff but somehow feel the answer has to be more concrete.

Isn't the goal of inflation control just simple wealth destruction? It seems companies with high fixed costs collapse and there are bankruptcies. Collateral holders get assets for a discount. The pain is spread around but probably hits the less prepared the hardest. The news is talking about a whole bunch of recently retired kind of being forced to return to the work force after nest eggs got substantially lighter recently.

I am reading that personal bankruptcy rates are actually going down compared to the pandemic era. Not sure if that relates to small businesses like hair dressers , carpenters etc. Probably job availability is tempering the asset losses?

 

[copyright1997reloaded]

I am reading that personal bankruptcy rates are actually going down compared to the pandemic era. Not sure if that relates to small businesses like hair dressers , carpenters etc. Probably job availability is tempering the asset losses?

Bankruptcy filings are a lagging indicator. For example, for the great recession, things started falling apart late 2007 but bankruptcy filings did not peak until 2010.

 

[Koolau]

When ever inflation control is mentioned a whole lot of ideas and terms arise. I read the stuff but somehow feel the answer has to be more concrete.

Isn't the goal of inflation control just simple wealth destruction? It seems companies with high fixed costs collapse and there are bankruptcies. Collateral holders get assets for a discount. The pain is spread around but probably hits the less prepared the hardest. The news is talking about a whole bunch of recently retired kind of being forced to return to the work force after nest eggs got substantially lighter recently.

I am reading that personal bankruptcy rates are actually going down compared to the pandemic era. Not sure if that relates to small businesses like hair dressers , carpenters etc. Probably job availability is tempering the asset losses?

No expert, but if inflation is (in very simple terms) too many Dollars (or Francs or DM or Pounds) chasing too few goods, you have to increase goods or reduce Dollars, etc. Since borrowing/lending increases the money supply, an "easy" way to reduce the money supply is to increase the cost of borrowing (raise interest rates.) Also, the FED can actually take money out of circulation though I don't know the exact mechanism.

Business increases goods availability, but gummints can "encourage" doing so by jaw boning or incentives. I don't think the idea is to "destroy wealth" it is to destroy "money" so that it is more valuable. Inflation is what destroys wealth.

Now, maybe an expert can give us the real story since YMMV.

 

[MichaelB]

Isn't the goal of inflation control just simple wealth destruction? It seems companies with high fixed costs collapse and there are bankruptcies. Collateral holders get assets for a discount. The pain is spread around but probably hits the less prepared the hardest. The news is talking about a whole bunch of recently retired kind of being forced to return to the work force after nest eggs got substantially lighter recently.

You’re referring to monetary policy. Yes, the policy is to try and reduce aggregate demand. Part is wealth reduction, and part is income reduction. In this cycle the Fed seems to be trying to reduce both. Over the last half of the past century, however, the policy measures were much more directed at reducing income by decreasing employment. The Fed targeting wealth (if that is the case) as a policy measure is not common. It does seem to be appropriate, given the imbalances in our economy.

 

[milford]

You’re referring to monetary policy. Yes, the policy is to try and reduce aggregate demand. Part is wealth reduction, and part is income reduction. In this cycle the Fed seems to be trying to reduce both. Over the last half of the past century, however, the policy measures were much more directed at reducing income by decreasing employment. The Fed targeting wealth (if that is the case) as a policy measure is not common. It does seem to be appropriate, given the imbalances in our economy.

If you don't mind to elaborate not quite sure what you are referring to as income reduction. My understanding is that the Fed's policy is to maximize employment with steady increases in income. The last thing they want is to create a deflationary environment.

 

[Koolau]

If you don't mind to elaborate not quite sure what you are referring to as income reduction. My understanding is that the Fed's policy is to maximize employment with steady increases in income. The last thing they want is to create a deflationary environment.

Yeah, a deflationary environment would be over-shoot. I don't think we need fear that for a while. We've got a lot of unwinding to do just to take some of the inflationary pressure out of the system. YMMV

 

[folivier]

I've been saying for years that the fed should increase interest rates. It hasn't been difficult to see where we're heading even years ago. You just have to have a forward looking mindset rather than just living in the moment as most people do. Unfortunately nobody listens to me.
Here in Louisiana I recently received 2 mailers from state reps asking how we should spend the large surplus that Louisiana currently has. My response was to lower taxes and send a refund to the people rather than trying to find additional ways to spend more money. Geez they just don't get it. Our roads are in terrible condition as they've always been and they're spending money replacing signs. Many secondary highways have NO shoulders.
My biggest fear is there is no way to control the growing deficit and we will shortly reach the peak and fall off the other side. God help us all.

 

[copyright1997reloaded]

I've been saying for years that the fed should increase interest rates. It hasn't been difficult to see where we're heading even years ago. You just have to have a forward looking mindset rather than just living in the moment as most people do. Unfortunately nobody listens to me.
Here in Louisiana I recently received 2 mailers from state reps asking how we should spend the large surplus that Louisiana currently has. My response was to lower taxes and send a refund to the people rather than trying to find additional ways to spend more money. Geez they just don't get it. Our roads are in terrible condition as they've always been and they're spending money replacing signs. Many secondary highways have NO shoulders.
My biggest fear is there is no way to control the growing deficit and we will shortly reach the peak and fall off the other side. God help us all.

Like Don Quixote, I too have flailed at the occasional windmill, both here (in terms of trying to warn the "I have enough, so I am going all fixed/long term bond" crowd) and in "real" life w/friends who thought/think that injecting tons of new money into the system and at the same time doing things to discourage supply was a good thing.

The reality is that you are very unlikely to change peoples position or thoughts. All you can do is prepare yourself and (perhaps) your immediate family as best you can for whatever is to come.

 

[folivier]

Yes, I know that I'm flailing at windmills. That's what makes it so frustrating. So many seemingly intelligent people don't look down the road far enough to see what is happening.
As far as preparing ourselves we're leaving next week for the mountains where at least if power is out we won't suffer from lack of air conditioning. I just worry for my sons and their families.

 

[copyright1997reloaded]

I just worry for my sons and their families.

I get it. I have had numerous conversations with a friend who is older. Inevitably, those end up with a statement from him something like: "Well, even if it gets bad I still have enough to last me the rest of my life". That's his way of deflecting from how we seem to be self-destructing as a society.

I tell him (to deaf ears) that "It isn't all about you. What about your niece and nephew and their kids"?

Honestly, I don't fear for myself, regardless of what happens. I fear for my kid and my nieces and nephews and their children, and the countless others out there.

 

[MichaelB]

If you don't mind to elaborate not quite sure what you are referring to as income reduction. My understanding is that the Fed's policy is to maximize employment with steady increases in income. The last thing they want is to create a deflationary environment.

Yes, the Fed has two mandates, employment and inflation.

Inflation is most dangerous when it becomes chronic, where prices and wages feed into each other and create a self-sustaining cycle. This happened in the 80’s. The Fed can only break this cycle by increasing unemployment and removing the upward wave pressure. That’s what Paul Volker did in 1981.

There appears to be some concern this may be happening. There’s certainly no doubt that strong consumer demand is causing some of the current high inflation. My post wasn’t suggesting this is or will happen. I think probably not. Still, it’s a possibility and should be taken into consideration.

 

[GTFan]

I get it. I have had numerous conversations with a friend who is older. Inevitably, those end up with a statement from him something like: "Well, even if it gets bad I still have enough to last me the rest of my life". That's his way of deflecting from how we seem to be self-destructing as a society.

I tell him (to deaf ears) that "It isn't all about you. What about your niece and nephew and their kids"?

Honestly, I don't fear for myself, regardless of what happens. I fear for my kid and my nieces and nephews and their children, and the countless others out there.

To me it's more about fatalism than anything else. You see the warning signs blaring and nothing's getting better, so whether it affects you or your children/grandchildren, there's nothing much that seems to change where we're heading.

We can only hope that our younger gens take action, for us boomers and later it's too late IMO. Too many folks are locked in and are not willing to listen to anything that contradicts beliefs.

 

[Koolau]

Yes, I know that I'm flailing at windmills. That's what makes it so frustrating. So many seemingly intelligent people don't look down the road far enough to see what is happening.
As far as preparing ourselves we're leaving next week for the mountains where at least if power is out we won't suffer from lack of air conditioning. I just worry for my sons and their families.

Your post made me flash back to the morning we got the text warning that there was a nuclear missile inbound from N. Korea. Folks later asked "How did you feel? Were you frightened?" I answered honestly that I wasn't particularly frightened. Concerned, I suppose, but not frightened. I didn't look around for a place to hide. Just huddled with my DW and told her I loved her. BUT here was what was going though my head: What kind of world will our kids now have?

I'm getting a bit of that feeling now. I recall the travail the country in general and my family in particular suffered during the last "run away" inflation. It colored my world from then on and we actually came out (relatively) okay on the other side of that one. Some day (hopefully not in my life time or my kids' lifetimes) it "will be different this time." Is this the time? What kind of world would that be for my kids to live in? That's the biggest fear I have for the current inflation "issue" but YMMV.