'Is monetary policy even working?'

https://www.ft.com/content/78aecb9f-a2bb-48bb-b868-0e11ef68eddf

by belter • 2 years ago

26 62 2 years ago

ft.com

belter• 2 years ago

https://archive.is/Cm8MK

alephnerd7• 2 years ago

The core point from the article (because no one will actually read it):

"Higher interest rates have proved a lot less destructive than investors feared in 2022, when the world’s central banks embarked on one of the most aggressive episodes of monetary tightening in history. Nothing has “broken”, contrary to the prevailing view two years ago; and this has even sparked a lively debate about why mainstream macro exaggerated the dangers of higher rates."

Basically, a lot of people assumed (high interest rates = slowing economy), but the current status quo reflects otherwise. Personally, I'm happy that it has now re-incentivized saving, and a much more mercenary and productivity driven outlook.

lenerdenator• 2 years ago

Usually, it does equal a slowing economy. But IMO there's a difference this time in that a lot of economic "growth" was being carried out by businesses that couldn't exist in a reasonable interest rate environment (which is exactly what Jerry Powell's environment is) and honestly just wanted to cash out.

Think of how many startups only existed to set money on fire until they completely captured a market, or how many got bought by the likes of FAANG+MS just to only kind-of have an integration into products/services that were made.

This has just been a return to the normal rules of business: you need to be able to create a return on investment in a reasonable amount of time, and with a reasonable amount of resources.

alephnerd7• 2 years ago

Largely it's this point below from the article:

"The obvious one is fiscal policy, with governments everywhere using budgetary stimulus more actively since the pandemic. The impact of higher interest rates has been dampened in two ways. First, consumers had high levels of liquid assets (sometimes called “excess savings”) left over from the pandemic, which provided a financial cushion that protected their spending power. Second, governments have been deploying additional funds since COVID-19, such as the large energy support programmes in Europe and Bidenomics in the US (big tax subsidies that encouraged US companies to invest heavily in green energies). These funds have supported incomes and employment, even as monetary policy engineered a squeeze"

-----

People on here are overstating the impact of a handful of software companies and buzzwords on the larger economy.

AnimalMuppet• 2 years ago

This wasn't "one of the most aggressive episodes". This was nothing compared to Volcker in 1979-1981.

And the fact that nothing has broken indicates that they didn't go overly aggressive. They stopped inflation from getting worse without driving the country into a recession. That's a pretty decent balancing act.

alephnerd7• 2 years ago

Pedantry and HN. Name a better combo.

But yea I agree with ya on the 2nd half.

smallmancontrov4• 2 years ago

The economy that Volcker hiked into wasn't nearly as leveraged (because the debt had been inflated away / soft defaulted upon). A small rate increase on a lot of debt vacuums up as much money as a large increase on a small amount of debt. However, the duration on most household/corporate debt at the moment is such that it hasn't felt the sting of rate increases yet. As usual, it's complicated.

Temporary_313373• 2 years ago

Too early to tell IMO. The fact that inflation is going up again tells me they may have played too safe with the only blunt instrument that they have

A4ET8a8uTh04• 2 years ago

They did slow it down ( including the form of couple banks going under and Summers begging for a bailout ). It just so happens that federal government also managed to pass some corporate stimulus in the form of 'green new deal' or whatever they ended up calling it and war of Ukraine, which helps domestic warmachine ( billions from misnamed foreign aid ).

edit: Oh, and the Summeers did manage to scare enough people to rescue SVB so that impact was absorbed, amusingly, by other banks via extraordinary FDIC fee ( most banks have it listed now on their quarterly statement in case you are inclined to check ).

alephnerd7• 2 years ago

Foreign Aid for Ukraine is overstated. It's just $5bil, which is a drop in the bucket for even state governments in the US.

If that's the cost to fight a proxy war, it's fairly cheap.

That's how much it costs to build a highway from Pittsburgh to Morgantown (Mon–Fayette Expressway).

managed to pass some corporate stimulus

This is the key point, and a critical one at that. That corporate stimulus suddenly made swathes of American manufacturing, construction, etc cost effective again.

randomdata• 2 years ago

a lot of people assumed (high interest rates = slowing economy)

A fair assumption. It is extremely likely that the economy is slower than it would have been if interest rates remained low. Things were starting to get extremely hot – which is why we saw higher interest rates arrive in reaction.

There was a lot of concern floating around that rates would overcorrect (which, to be fair, may still prove to be the case – it is still early days), leading to an economy slowing more than needed, but the so-called "soft landing" was always the goal. Explicitly so. The status quo is in quite in line with what we were hoping to see come out of the higher rates, slowing the economy just enough, but not too much.

nostromo• 2 years ago

They can't stay this high for long without a federal debt crisis, which is a key reason the Fed is hoping to get interest rates back down.

If we weren't so indebted, interest rates could indeed stay high for a long time without much concern. But there's a point in the not-so-distant future where our government will need to print even more money to pay the debt (which will spark more inflation) or we'll need to cut all spending that isn't interest on the debt.

orwin• 2 years ago

If so, there is a way to destroy inflation, its raising taxes. Put taxes on wealth and on secondary homes and non-commercial renting, destroy the money, less inflation. Easy.

skeeter2020• 2 years ago

> Central bankers have long argued that changes in interest rates affect global economies with “long and variable lags”.

Which is another way of saying if there's a link it is very weak, and those not very useful for driving anything behind long-term strategic direction, certainly not day-to-day policy.

alecsm• 2 years ago

What bothers me is that in Europe it was expected to affect the real estate prices. The higher the interest, the lower the prices, which sounds logical but...the prices kept increasing.

So what's going to happen when Lagarde decides to lower them? The demand is way to high and the offer is almost non existent.

And it seems that it didn't affect the inflation either. Bad years for everybody who's not getting a 10% raise every year.

r00fus• 2 years ago

Basically most humans. Hedge funds are doing great.

ASinclair• 2 years ago

One problem is that housing is supply constrained in many places. Homebuilders need loans too. So high rates increase homebuilders costs as well.

Temporary_313373• 2 years ago

Homebuilders are hesitant to set up new projects as the new builds will be more expensive than the already elevated house prices- higher labour and materials costs higher interest payments for the home builders And finally More expensive mortgages for the end clients. This kills supply and it will send prices into the stratosphere.

MuffinFlavored• 2 years ago

The higher the interest, the lower the prices, which sounds logical but...the prices kept increasing.

This is a side effect of "demand" I think.

Higher interest rates increase mortgage/financing costs. This is supposed to "destroy" demand.

Except, there's so much demand (and so little supply) that it didn't, and we're getting the worst of both worlds.

In the US: A $500k 3/2 house at 2.75% 30-year fixed in 2020 is now $750k at 6.75%

It "shouldn't" have played out that way but my theory is

Home buyers from before ~2015 (random guess) are "up so much" in equity from this quiet "real estate inflation/demand appreciation boom" that they don't care to "overpay" $200k compared to what they would've paid 4 years ago because they were "gifted/given" $200k+ in equity out of the sky. They're just moving the money from one property to the next.

vundercind• 2 years ago

People with very low mortgage rates are trying really hard to avoid moving. Constrains supply.

jajko3• 2 years ago

This explains what I am seeing in various parts of Europe too. Bad properties (mostly by location) experienced some swings (as they always do when some troubles come like in 2008), but better ones didnt even flinch and just continue rising (maybe only moderately when adjusted by inflation but still).

Maybe a bit harder to sell but still they seem to sell. And everybody seems to expect interest rates to decrease soon, which will lead into even higher rise.

But what do you expect - people in Europe generally dont use / trust / understand stock market, and real estate at least in past 5-6 decades was by far the best investment for common folks. Stuff they understand, can use, can physically see and hold.

Plus in at least a bit touristy locations airbnb is helping massively with mortgage payments, and before 'communists' here come again with 'eat the greedy rich because we want our own houses too' - the demand from travellers is there, in past few years massive (and often hotels are simply not good enough for ie families with small kids while being 2-3x more expensive).

unyttigfjelltol• 2 years ago

Isn't effective tightening for global multinationals a function of tightening the lowest global interest rate? Which refers to Japan, and Japan only just a few weeks ago exited negative territory and has not tightened meaningfully at all.

naniwaduni• 2 years ago

Well, it's affected by the marginal interest rate available to them. The supply of liquidity for global multinationals isn't unlimited.

throw0101b• 2 years ago

See perhaps:

* https://en.wikipedia.org/wiki/Monetary_transmission_mechanis...

Cullen Roche is always worth checking out:

Monetary Policy is the various set of policies initiated by the Central Bank to try to stimulate or slow the economy. This typically includes changing interest rates, altering the size of the balance sheet and communicating via “open mouth policy”. The transmission mechanism of these policies are controversial and the goal of this post is to add some clarity to the ways in which this works.

* https://www.pragcap.com/monetary-policy-transmission-mechani...

It should also be asked "working at doing what, exactly?". If you have an hot economy because of a lot of demand because of easy credit creation, then clamping down on credit creation can help in slowing things down:

* https://en.wikipedia.org/wiki/Demand-pull_inflation

If however you have (e.g.) a geopolitical event that causes (say) a spike in food and energy prices, then that's not really an issue that is largely controlled through credit creation:

* https://en.wikipedia.org/wiki/Cost-push_inflation

Then there are other scenarios, like sudden changes in consumer behaviours that cause problems:

* https://ritholtz.com/2022/06/goods-versus-services/

* https://www.detroitnews.com/story/business/2021/04/19/global...

* https://www.cnbc.com/2022/02/18/whats-behind-the-congestion-...

* https://www.frbsf.org/research-and-insights/publications/eco...

Some of these things monetary policy can deal with better than others, but a lot of folks expect monetary to do something (anything!), and if it doesn't make an attempt than there's all sort of other drama.

Jrjrir48• 2 years ago

lack of any significant economic slowdown.

If you believe data, monetary policy clearly does not work. We are doing better than ever!

If you do not believe data....

kypro• 2 years ago

For monetary policy to work it requires rate sensitive borrowers. If borrowers don't care what rates are then it's not going to have much impact. US households have fixed mortgages so most don't care what interest rates are and the US government obviously doesn't give a damn what interest rates are and will continue borrowing regardless.

Another thing to consider is that counter intuitively higher interest rates might be acting as a form of stimulus for many US households. If you've got a fixed mortgage and the government is now paying you for your savings your total disposable income might actually be increasing with rate hikes.

NEETPILLED• 2 years ago

lol, except for all the bank failures that required BTFP / another bailout. Commercial real estate meltdown anyone? Imagine if the FT didn't publish economist propaganda for once.

1vuio0pswjnm7• 2 years ago

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'Is monetary policy even working?'

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