Fed Now Says It Should Have Acted Sooner on Inflation

[copyright1997reloaded]

"Hindsight is always 20:20. I don't recall many of us demanding FED action a year ago."

Clearly that does not mean no one was.

While I didn't include any of the posts, I have tried to warn people who were all fixed because they "won the game" that declining market prices for securities weren't their only risk, and that they needed to pay attention to inflation (which was supposedly tame). Here we are. I've pretty much given up on trying to convince anyone of anything, even here in anonymous land.

I can only try to do the best to prepare myself for what is coming (which we are starting to see). The Fed can't fight inflation: We have rates near zero and even the thought of a 50 basis point rate hike (now 25) causes market disruption. Just think, what's the real interest rate if inflation is 7.5% and the federal funds rate is raised a whopping .25 %. Or even .5 %. And even today, they are still doing QE (easing). Not only are they behind the curve, they are no where in sight of the curve.

However, we might just get demand destruction the hard way - through sky high energy prices, possibly much higher food costs (due to supply disruption from Ukraine and MUCH higher fertilizer costs).

What worries me most is that our fearless leaders (and perhaps most of the population) still don't get it. Or maybe they do, and realize that there is no way to stop the train, so they may as well keep printing money.

 

[luckydude]

While I didn't include any of the posts, I have tried to warn people who were all fixed because they "won the game" that declining market prices for securities weren't their only risk, and that they needed to pay attention to inflation (which was supposedly tame). Here we are. I've pretty much given up on trying to convince anyone of anything, even here in anonymous land.

+1

For the last decade, virtually all the discussions on FIRE risks focused on investment rates of return and possible corrections. Inflationary risk was really never mentioned as a risk factor because, well, we had had a decade of extraordinarily low rate of inflation.

---Disclaimer: I plead guilty to being one who up to now hadn't given much thought to inflationary risks.

But now FIRE folks face a double whammy of negative market returns as well as rising expenses due to inflation. It's not a pleasant prospect to see one's portfolio go down 10-20% while one's RE budget goes up 7% because of inflation. A couple of years of this and I suspect some folks may be in a tight spot.

 

[Montecfo]

In 2009 businesses weren't forcibly shut down by the government while money was handed out to everyone.

Yes I certainly agree. In fact one of my points is that this was not primarily a FED engineered bout of inflation. It was a number of factors, most prominently the ones you cited.

Yet the thread title is about monetary actions, not fiscal.

 

[Montecfo]

I agree. There is a dominant deadtime (the time it takes after making a change until you first begin seeing a response change in the inflation variable) and lag (the slope of the inflation rate vs. time as it either rises or falls after the dead time is reached) between when the Fed raises or lowers rates and the impact on inflation reaches steady state.

And this process is continuous. Other variables are constantly impacting the eventual outcome even as the Fed is making adjustments based on the previous feedback data.

It would be like riding a bicycle which, when you turn the handle bar, it takes 6 minutes before the wheel begins to start turning, and the amount that the wheel eventually turns is twice as much as you turn the wheel. There would be a lot of crashes during the learning curve of the steering process dynamics.

Exactly right. Accordingly the FED needs to take a measured approach.

 

[ownyourfuture]

Whenever the subject of the federal reserve and interest rates comes up, I think of this.

When I bought my first home on July 1, 1994, a 30 year fixed was at 9.25%
an adjustable 6.375%

If memory serves, the economy was doing fine, the markets were doing fine, everything seemed to be OK.

I realize that's going on 28 years ago, but why is it that today, with interest rates at or near historic lows, the federal reserve seems downright terrified to raise them a measly 25 basis points ?

 

[daylatedollarshort]

While I didn't include any of the posts, I have tried to warn people who were all fixed because they "won the game" that declining market prices for securities weren't their only risk, and that they needed to pay attention to inflation (which was supposedly tame). Here we are. I've pretty much given up on trying to convince anyone of anything, even here in anonymous land.

It depends on the type of fixed income. Inflation adjusted fixed income isn't performing too shabby right now, likely 0 - 3% yields plus 7.5% inflation factors.

 

[Helen]

Whenever the subject of the federal reserve and interest rates comes up, I think of this.

When I bought my first home on July 1, 1994, a 30 year fixed was at 9.25%
an adjustable 6.375%

I bought my first home in 1993 and if I remember right my interest on a 30 year fixed was 8.something %. I refinanced less than two years later to a 6.5% 15 year mortgage. I remember thinking I would never see rates that low again.

I realize that's going on 28 years ago, but why is it that today, with interest rates at or near historic lows, the federal reserve seems downright terrified to raise them a measly 25 basis points ?

At what point can we not afford the interest payments on the national debt? Does this influence the Federal Reserves decision on raising rates?

 

[Montecfo]

Whenever the subject of the federal reserve and interest rates comes up, I think of this.

When I bought my first home on July 1, 1994, a 30 year fixed was at 9.25%
an adjustable 6.375%

If memory serves, the economy was doing fine, the markets were doing fine, everything seemed to be OK.

I realize that's going on 28 years ago, but why is it that today, with interest rates at or near historic lows, the federal reserve seems downright terrified to raise them a measly 25 basis points ?

Because it is the direction of change that is more important right now. The Fed has moved from an expansionist posture to a tightening one. That's a very significant change in direction.

And when you are at zero .25 is large. More so than going from 3.0 to 3.25.

And I don't think they are terrified They are being measured and trying not to spook the credit markets.

And of course the full move is expected to be much more than the .25.

A lot is at stake.

 

[luckydude]

In the 80s, inflation reached 14% before the Paul Volcker Fed raised rates to 20% to break it, causing a brief recession. Today, at 7.5% inflation, the equivalent interest rate to succeed would be 10%.

Everyone ready for that? (Didn’t think so.)

There really isn't much of a choice at this point. Ready or not, hikes are coming (I hope).

 

[luckydude]

Because it is the direction of change that is more important right now. The Fed has moved from an expansionist posture to a tightening one. That's a very significant change in direction.

And when you are at zero .25 is large. More so than going from 3.0 to 3.25.

And I don't think they are terrified They are being measured and trying not to spook the credit markets.

And of course the full move is expected to be much more than the .25.

A lot is at stake.

Despite a year's worth of inflation data, the Fed had been singularly unable (some might say unwilling) to even acknowledge that there might be a problem with inflation. It's one thing to be measured, but quite another to ignore a year's worth of data and pretend that everything was fine. They could've signaled a change in direction and possibly (gently) tap the break earlier instead of letting inflation build up to the point now where they will have no choice but to slam on the break.

Had they acted earlier, we might have had a soft landing. Now we're destined for a hard landing (exacerbated by rising energy prices from the war in Ukraine). It's about to get ugly and it's all squarely on the Fed.

 

[pb4uski]

In the 80s, inflation reached 14% before the Paul Volcker Fed raised rates to 20% to break it, causing a brief recession. Today, at 7.5% inflation, the equivalent interest rate to succeed would be 10%.

Everyone ready for that? (Didn’t think so.)

Yes, I'm well positioned for that and a brief recession would not necessarily be a bad thing in the long run.

 

[pb4uski]

In 2009 businesses weren't forcibly shut down by the government while money was handed out to everyone.

But 2009 wasn't a pandemic with hundreds of thousands of Americans sick, hospitalized or dying.... different times call for different measures.

If on the last part, if you're talking about the various EIPs, it did help a lot of those who live from paycheck to paycheck.

 

[kjpliny]

I don't really listen to what the Fed says anymore. It's what they do that I pay attention to. The past 14 years has shown that their primary mandate is to prop up markets. The other official mandates are secondary.
Since 2008, our national debt has increased $23T and the Fed's balance sheet has increased another $8T. That is over $30T in fake "wealth" added to the system, most of which went into stocks, real estate and keeping rates artificially low.

We've been overdue for a return to real valuations, but they simply won't let it happen. National security level stuff.

 

[copyright1997reloaded]

It depends on the type of fixed income. Inflation adjusted fixed income isn't performing too shabby right now, likely 0 - 3% yields plus 7.5% inflation factors.

Agreed. Most of my fixed (other than short term of which I have "too much" given rates) is in inflation adjusted.

 

[copyright1997reloaded]

Despite a year's worth of inflation data, the Fed had been singularly unable (some might say unwilling) to even acknowledge that there might be a problem with inflation. It's one thing to be measured, but quite another to ignore a year's worth of data and pretend that everything was fine. They could've signaled a change in direction and possibly (gently) tap the break earlier instead of letting inflation build up to the point now where they will have no choice but to slam on the break.

Had they acted earlier, we might have had a soft landing. Now we're destined for a hard landing (exacerbated by rising energy prices from the war in Ukraine). It's about to get ugly and it's all squarely on the Fed.

They will do everything they can to prevent a hard landing. What I mean by this is that they will instead allow inflation to continue.

"all squarely on the Fed". Thinking about this, in a not so nice analogy: The FED is the drug dealer, and we are the strung out junkies. Who is to blame?

This whole thing is quite depressing and my heart aches when I look around me at young people who are about to have a much rougher life than we would want for them, and old who thought they had things worked out and who might soon find themselves in a bad place. All because we (collectively) haven't wanted to face being prepared, having the country not be addicted to debt, deficit spending and living larger than we should have.

Having said the above, I do know that my feelings are clouded by war and by what's going on in the last couple years. Perhaps this will just be a repeat of the many crisis's of the past and we will move onward and upward. One thing (again my opinion) is that even with an asset bubble, I'm not looking for the stock market to crash. Why? Again because I believe those in power would rather kick the problem even further down the road via inflation.

ETA: I also know that technology, medical improvements, and other things that can improve our lives continue...and that "in the long run" these things can and should outweigh issues we have now. Sometimes it is easier to see what can go wrong than what can go right. That, in a nutshell, is why long term investing makes sense.

I am also not the person who goes "all in" on anything. So I sell a little, reduce cash somewhat, shift a little to PM's, try to keep my LT fixed to a minimum or in inflation protected, have a good supply of food, have an alternative source of energy to heat my home, and so on.

Most importantly I try to still live my life - go on walks, go skiing (cross-country and downhill), and try not to watch the news too much.

 

[Markola]

Yes, I'm well positioned for that and a brief recession would not necessarily be a bad thing in the long run.

The Fed really does have to stop preventing all recessions, which wring out zombie companies and cleanse other inefficiencies. In doing so repeatedly, they are exploding the nation’s debt. And that’s a big difference from the Volker Fed of the 1980s. If they raise rates high enough to snuff out inflation, the country will have a harder time making its debt payments. It’s quite a box.

 

[pb4uski]

The Fed really does have to stop preventing all recessions, which wring out zombie companies and cleanse other inefficiencies. In doing so repeatedly, they are exploding the nation’s debt. And that’s a big difference from the Volker Fed of the 1980s. If they raise rates high enough to snuff out inflation, the country will have a harder time making its debt payments. It’s quite a box.

The nation's debt is a result of US deficit spending, what does the Fed have to do with that? That's on Congress and the Administration.

While the second part of what you write is true, if they do raise rates it doesn't affect current debt issued one iota... the impact to interest cost bleeds in over time as new debt is issued for future deficits and refinancing of existing debt.

 

[BeachOrCity]

If they raise rates high enough to snuff out inflation, the country will have a harder time making its debt payments. It’s quite a box.

precisely !

 

[Markola]

Yes, you’re right that our debt and deficit are due to Congress’ choices. The Fed does not contribute to debt, though its huge debt holdings through quantitative easing are a newer phenomenon. They say they can manage QE holdings down, though.

 

[Montecfo]

Yes, you’re right that our debt and deficit are due to Congress’ choices. The Fed does not contribute to debt, though its huge debt holdings through quantitative easing are a newer phenomenon. They say they can manage QE holdings down, though.

And they are already.

 

[Koolau]

So what are some defensive moves we might consider during this time of uncertainty? Trimming equities? Increasing cash? Commodities? Mortgages or other borrowing? I've already trimmed spending due to Covid and the realization that I'm not taking any of my stuff with me. Currently, I'm only replacing what's broken. I'm not BTD for the most part but YMMV.

 

[ownyourfuture]

I bought my first home in 1993 and if I remember right my interest on a 30 year fixed was 8.something %. I refinanced less than two years later to a 6.5% 15 year mortgage. I remember thinking I would never see rates that low again.



At what point can we not afford the interest payments on the national debt? Does this influence the Federal Reserves decision on raising rates?

I'm guessing a total of 10 family/friends advised me on what to do when I got my mortgage in July 1994. (9.25% 30 year fixed or 6.375% adjustable)

Each & every one of them told me the same thing “do NOT do the adjustable” It was pure luck on my part, but I chose the adjustable. 6.375% just sounded better than 9.25%

The rate was adjusted annually via an index called ‘the national monthly medium cost of funds index’

At that time I didn't have a computer, so no access to the Internet. That index was only included in the Wall Street Journal. Thankfully the plant I worked at had a subscription so I could monitor it.

The rate went up to 6.90% the 2nd year, & reached 7.19% by the 3rd.
I was getting very anxious, thlnking that if the adjustable kept rising, I'd never hear the end of it from those who told me to go with the fixed.

If I wanted to switch it to a fixed, I had to do it within 5 years.
Luckily for me, I decided to let it ride

As for your question on whether or not debt influences the federal reserve,
I would say yes. I also believe the markets influence the federal reserve far more than they did say, 35 or 40 years ago, when far more people in the private sector had a defined benefit pension plan.

Today they have 401(k)s and/or IRAs

 

[Montecfo]

But 2009 wasn't a pandemic with hundreds of thousands of Americans sick, hospitalized or dying.... different times call for different measures.

If on the last part, if you're talking about the various EIPs, it did help a lot of those who live from paycheck to paycheck.

The advisability of those actions, which line the path we find ourselves on, would be much livelier than Fed actions or inactions.

Yet it is all Monday morning quarterbacking. What we need now is a path forward.

Normalized rates (10 year at 2.5 to 3.5 pct)

Sharply reduced government deficits.

Continued reduction of government restrictions on people and businesses.

The last two probably more important than the first, in my view.

 

[ownyourfuture]

Despite a year's worth of inflation data, the Fed had been singularly unable (some might say unwilling) to even acknowledge that there might be a problem with inflation. It's one thing to be measured, but quite another to ignore a year's worth of data and pretend that everything was fine. They could've signaled a change in direction and possibly (gently) tap the break earlier instead of letting inflation build up to the point now where they will have no choice but to slam on the break.

Had they acted earlier, we might have had a soft landing. Now we're destined for a hard landing (exacerbated by rising energy prices from the war in Ukraine). It's about to get ugly and it's all squarely on the Fed.

AAA+++

 

[cyber888]

Inflation will not depend on the Feds increase interest rates. Inflation is caused by shortages in the Global Supply Chain. Fix the global supply chain to meet demands, and that will change the inflation trajectory. This is a supply side shortgage problem, not lowering the demand side.