The terminal rate does not need to go above inflation.

Submitted by nonasiandoctor t3_yi0vco in wallstreetbets

Fucking stop parroting this garbage. Yes Volcker raised the interest rate above inflation. However that was a coincidence. The interaction between inflation and the interest rate is much more dependent on the level of debt in the economy.

If you owe a trillion dollars and interest is 0% that's fine. But then when it's 1% that's a fuck load of money.

Debt levels are way higher than they were in the 80s so interest rate hikes have an outsized impact.

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robotraitor t1_iugtuee wrote

fed chair powell stated in the QnA, of the sept. press briefing(5th question I think), that it would be necessary to raise to positive real interest rates in order to stop inflation.

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Affectionate-Law1680 t1_iuh74un wrote

Even better, every single TIP the us government has issued currently trades with a positive yield. Every last one has a positive real yield.

The market is telling OP they are an idiot, not some randos on the internet

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why_rob_y t1_iuhacul wrote

Right, but don't forget that as he raises rates, he'll be lowering inflation (with a bit of a lag). So rates don't need to go to 9+% or something.

Also, the quoted inflation rate you hear is an annual rate while the quoted rate you hear about the Fed raising is an overnight rate. It's apples and oranges to compare those numbers and JPow is likely looking at more direct comparisons (the forward 12 month rates vs the projected inflation rates for those periods).

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Such-Wrongdoer-2198 t1_iui71s6 wrote

True, but it's a dynamic system. Powell's statement doesn't mean that the peak Fed Rate must exceed the peak inflation rate. Just that the overnight rate must exceed inflation before equilibrium can be achieved. The Overnight rate may need to go up more, but inflation could also come down (it has).

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VisualMod t1_iugoov0 wrote

>I'm sorry, nonasiandoctor. I didn't mean to upset you.

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kit19771979 t1_iuhcw3v wrote

This is easy. If inflation is 8% and your risk free investments (government issued debt like T-Bonds, T-Bills are returning 4%), then it makes sense to spend the money you have. Here’s why, you are losing 4% every year by holding cash because 8-4=4. If you wait to spend that money for a year and invest in T-Bonds, you will have less money a year later when you cash out the T-Bond. High inflation discourages saving money and encourages people to spend all their money right now because if it losing value every single day. It encourages costly practices for businesses and consumers like hoarding supplies because it is cheaper to buy it today than it is tomorrow. This creates huge inefficiencies in the market and encourages a inflationary wage spiral as workers demand more raises to keep up with inflation, which is stripping away wages and savings.

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d00ns t1_iuh3n8k wrote

You need positive real rates to encourage savings.

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Careless-Pin-2852 t1_iugpqew wrote

You are correct and wrong at the same time. Interest rates need to ruse until inflation is at 2% or maybe 4%. There is a debate about 2% vs 4%.

But currently cars are still too expensive. And that was the biggest part of inflation. I work a second job at carmax and i can tell you most cars are financed so high interest will eventually bring car prices down.

I have not seen much of a drop in car prices yet so interest rates need to go up more. Maybe not to 9% but more. I have seen a slight slow down but not much.

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AutistGobbChopp t1_iugyyva wrote

>You are correct and wrong at the same time.

Can't wait to hear more about this

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Letters-to-self t1_iugzn6u wrote

Schrödingers Cat. We are all correct and wrong at the same time. img

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JP2205 t1_iuh911c wrote

People still buying overpriced cars with 6% loans?

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Careless-Pin-2852 t1_iuhnrod wrote

Yes. It feels like volume is down but people are still taking g Big loans for 4 year ild cars.

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JP2205 t1_iuhnyno wrote

Thats crazy. Im seeing pickup trucks for 50k and with 80000 miles on them. At 6% wondering who the hell wants a $900 car payment plus extra insurance. Doesnt seem like this is gonna end well.

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Careless-Pin-2852 t1_iui4f37 wrote

It needs to end with people taking the bus. That is not inflationary plenty of space on the bus.

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blatchcorn t1_iuh5wpu wrote

Who is seriously up voting this comment?

The OP is not correct and wrong at the same time. He is just correct.

We have higher levels of debt which increases the pain felt by interest rate increases.

Another factor is that some of this inflation is cost-push which should resolve itself eventually irrespective of interest rates, which only deal with demand pull inflation

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Careless-Pin-2852 t1_iuho1hp wrote

I have not seen used car prices fall yet and until That happens we need to keep upping interest rates

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blatchcorn t1_iuhqbip wrote

Ok let's hope the FED gives you a phone call so you can tell them when car prices fall and that's their signal to stop raising rates

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Careless-Pin-2852 t1_iui48oj wrote

Actually, the fed has an army of people to call places and asks them questions about prices. The odds of some low level fed person calling my store are low.

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JP2205 t1_iuh98c9 wrote

If you have inflation say 8% and rates at 3%, you just cant ignore that. It will break the whole system when people find out holding any money at all costs you a fortune. This creates more inflation as people try to spend their worthless dollars on stuff. The poor really suffer as prices go up but not their incomes.

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Fibocrypto t1_iugsmgp wrote

And Biden didn't go to the middle east to discuss oil .

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MathematicianKey5605 t1_iuhg7ue wrote

Love how we all act like we’re central bankers. They have NO IDEA what they’re doing. And we sure as fuck don’t either img

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HesitantInvestor0 t1_iujtnrb wrote

Statistically at least 40-60% of the people here are probably central bankers.

Trust me, I graduated from 3rd grade math.

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Substantial-Acadia-1 t1_iuic5cd wrote

Is there more public debt now than the 1980s? Yes that’s true by a long shot.

https://fred.stlouisfed.org/series/GFDEBTN

But what about household debt? Yes, that too was considerably less in the 1980s.

https://www.federalreserve.gov/releases/z1/dataviz/z1/nonfinancial_debt/chart/

But wait, aren’t there other considerations besides debt when raising the Federal Funds Rate…such as well I don’t know, inflation and m2 money supply growth?

https://www.longtermtrends.net/m2-money-supply-vs-inflation/

The m2 money supply growth we have experienced is off the charts! Right now real interest rates are still well below the rate of inflation.

Can you find a time in history where a high level of inflation have been able to be curbed without raising the Funds Rate above the curve of inflation? You won’t be able to because such a time in history never existed.

Can you provide a source proving that the interaction of inflation and interest rates are more dependent upon debt in the economy? I have not been able to find anything to support this claim, in fact to my understanding, the outstanding debt in the economy when put under pressure of higher interest rates would remove liquidity in the form of dollar debt from system via-defaulted loans and fewer borrowers due to higher interest rates. This should function similarly to unemployment going up having a cooling effect of inflation because it would lead to a reduction of demand because less money would be available to be spent in the economy.

As far as I can tell your argument is that raising rates in a bigger pile of debt is a bigger number if the debt is bigger? Macroeconomic theories are incredibly complex so I would like to hear your logic a bit more.

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nonasiandoctor OP t1_iuiej3f wrote

The interest rate and inflation rate are related. But there is no magic saying that inflation only comes down when the interest rate is above the inflation rate.

There are many contributing factors to current inflation. Energy, the war in Ukraine, the m2 supply. If you were to overnight fix the supply chain issues we would see inflation drop. Part of inflation is too much money chasing too few goods. If magically you doubled the number of goods available ( real productivity increase) then inflation would subside somewhat.

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MyBrilliantReality t1_iuju9id wrote

I’m a little slow… but if too much money chasing too few goods leads to inflation, wouldn’t less money chasing the same few goods also reduce inflation?

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ole_shanksies t1_iuhrte7 wrote

A highly regarded speaker is with us today.

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