Why the Fed won't cut rates... yet
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- เผยแพร่เมื่อ 15 มิ.ย. 2024
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Timestamps:
0:00 - introduction
1:34 - monetary policy in theory
7:05 - the case for higher rates
9:11 - the case against higher rates
13:56 - my take & ground news
Attribution:
Music by Epidemic Sound: nebula.tv/epidemic
Thank you to AP Archive for access to their archival footage.
Narrated and produced by Dr. Joeri Schasfoort
Is the Fed losing control of inflation again?
Has the Fed just lost control of inflation?
Will the US need higher interest rates forever to kill inflation?
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@MoneyMacro I know that it is only general outlook chart at 5:33 (bottom right), but gosh how bad that chart was done.
Where are periods with FLAT FED rates?
That chart is really looking ridiculous without them and as engienieer my eyes bleeding looking at it.
You didn't add points to chart when FED Funds rates were unchanged and linear connection between points with changed FED rates caused this chart is inaccurate.
Or you should use so called "step line" chart, so even without manually added points it would be looking correctly.
@@maciejs5763 its a problem with the software to animate the graph. I agree that the chart could be nicer. But, I still thinks this gets the general point across that rates have been hiked by quite a lot.
@@MoneyMacro just add manually points which that software need to plot.
Instead of:
July 26, 2023 5.50%
May 3, 2023 5.25%
March 22, 2023 5.00%
Use manually modified data like:
July 26, 2023 5.50%
July 25, 2023 5.25% -> manually added
May 3, 2023 5.25%
May 2, 2023 5.00% -> manually added
March 22, 2023 5.00%
little effort, but all charts will be looking correctly without need of changing software.
I feel like the US housing issue and private sector pushes for lower interest rates stem more from hopes that "things can return to normal" without needing to recognize losses or shift business models, than it does from "unexpected deviations" from accepted monetary theory.
Yes
100% also isn't it clear from this.
It's the corporations who start the inflation cycle.
They just jump at any chance to increase their prices. And by doing so they force everyone else to do they same.
Very true.
The US like being comfortable more than it does productive
Reading in the coffee @@the_expidition427
Only option is build more houses, zoning and building laws need to change to make it easier.
In Victoria, Australia during the worst housing crisis ever. They are trying to restrict the supply of electricians by increasing the schooling requirements.
Doesn't seem like they are interested in moving in the right direction at all
NIMBYs really ruining housing for millenials and gen z
While i don't like development in my area i suspect you may be correct. Other options would be to build new cities, or high speed trains so people can live further away from their job. While economically not sensible unless you can move jobs to lover costs locations i cannot see any alternative.
Worth noting that higher interest rates have been associated with housing starts in the US declining. Zoning reform is more helpful with creating denser, more walkable environments but evidence for longer terms impacts is a bit mixed (Auckland New Zealand is often brought up that did have prices rise slower than NZ as a whole for a few years but that has flipped more recently). More construction is helpful on a number of fronts depending on what gets constructed and where. For instance just building more suburbs further out leads to increased transportation costs and the externalities of car dependency but does lower housing prices. Yet the impact of interest rates is even larger considering how much of home construction and purchases relies on bank financing these days. So in the longer run, high interest rates can suppress home construction and given the outsized impact housing has on the economy and inflation, that is another point the Fed has to keep an eye on.
Modern US zoning is so bad yet so widely accepted for little to no reason
The most compelling case against Larry Summer's argument is that he's the one making it.
You said it! One of the guys whose ineptitude was part of why the GFC was so bad, I don't know why so many still value his opinion.
@@PXAbstraction because he was correct on 2021 stimulus being too large??
@@mohammedsarker5756 So what? I was also correct that the 2021 stimulus was too large but I'm saying inflation is not only not going up anymore but actually coming down, the labor market is a complete mess and much weaker than what the fed says, the economy is in a much worse state than what our governmnent tells us, and we need to cut rates, so who's right?
@@mohammedsarker5756And i was correct on pointing out the sky is blue LMAO where’s my nobel prize?
Also he's a corrupt big noser.
Larry Summers has been an inflation hawk for at least 15 years now. Idk if I'd pay much attention to him
The big problem with the US housing market (though it’s also a problem elsewhere) is the lack of supply in the most economically productive areas. But there aren’t many incentives to solve that problem given the increasing view of housing/property as an income generating asset.
The lack of supply is mainly a policy issue rather than an economic one. We have plenty of land, plenty of capital, expertise, resources, innovation. However, there is a massive political interest to keep the status quo. Zoning, parking requirements, minimum lot sizes, set backs, height restrictions, expensive cumbersome permitting process, lawsuits, NIMBY activist, huge Federal funding for highways, excessive building codes, goes on and on.
"Business has already raised prices by 8% and workers has already been promised raises"
No. The first thing will happen for sure. The second won't for the vast majority of people.
I actually disagree with your housing theory. People aren't selling specifically because they are waiting for interest rates to go back down, an expectation that the fed has set to not panic the market and prevent a recession. If instead, they expected interest rates to continue rising or stay the same there is very little investment to wait to sell or buy.
Yes exactly. Once sellers get the idea that high rates are here for good, they'll come around to selling again. That perception might take a year or two since we had almost 15 years of near 0% interest rates.
@@Fishpizza1212 sellers who don’t absolutely need to move will only sell in that case if they’re able to get a comparable or better home for the same monthly payment. That’s unlikely to happen if rates AND prices are high
@@adamv6917 in which case, they will only sell when their fixed rates are up
They are waiting because they saw their houses jump by 30-50% in price
They don't want to lower the price
Waiting for an interest rate drop is a proxy for that but in truth, it's real simple
The prices are too high
If they moved, at current prices, most homeowners (Who have sub 4% interest mortgages) would not be able to afford similar houses to the ones they currently have.
We have a feedback loop that is incrntivizing sellers to stay out of the market, thereby constricting supply and raising prices. Demand is high as it is in part from people moving around the country and from predatory investors.
If you aren't going to live in a home, you shouldn't be allowed to buy it. And if you do, you should not be allowed to resell it for at least 1 year. Get vultures and flippers to go away.
Thank you, thank you for this video It's the first explanation I've seen about why it takes so long for raid hikes to bite
How does this channel not have more subscribers?
Because facts don't sell. Fear and sensationalism does.
Not enough flames in his thumbnails 🔥😮
@@thomashaapalainen4108 Because people value their politics over people with credibility.
Significant antitrust us needed to restore a competitive market place. Just like Ma Bell we need to take a sledge hammer to regional monopolies and stop illegal coordination in industries like meat packing and many others
You can thank the FDA for the meatpacking monopoly
The airline market is actually such a cartel in the US that it's actually hilarious.
Is there a monoply in the Fudge Packing Industry?
Higher rates do affect housing market in US. It is just not as quickly as other places because here it is possible to get 30yr mortgage. However eventually higher rates would mean unemployment and reduced disposable income and financial hardship to pay the mortgages. So stressed sellers would need to sell at a lower price point. We started seeing the signs of this. Also there is clear drop in the prices now in major cities. I believe it’ll go down further or at least stay under inflation as the rates stay high. So high rates will do its thing but not as quickly as everyone expects.
There doesn't need to be unemployment, reduced disposable income and financial hardship to lower housing prices. It's simpler than that. In 2021, a $400k house cost something like $1800/mo, then same house now in 2024 costs $3600/mo. The total price is the same, but the per month cost has doubled because of higher interest rates. Someone who "could" have afforded a house on an $1800/mo budget in 2021 cannot afford that same house on a $3600/mo budget today. This, therefore, causes demand to shrink. Less demand means lower total prices.
This has slowed price inflation already, but it will take a long time, like 1-3 years and longer. Right now sellers are biding their time hoping rates go down before putting their house on the market. And builders are hoping rates go down soon to take on projects at better profit margins. But once everyone gets the hint that interest rates are not going down, the sellers and builders will go back to business as usual. Not to mention that 5% rates are still low historically.
"Also there is clear drop in the prices now in major cities."
There is? Where exactly is this happening when housing prices just reached all time highs again?
Low historically doesn't mean low. You are so close but so far away@@Fishpizza1212.
The prices are simply too high.
Further, the 400k house from 2021 isn't 400k anymore, it's 600k+, meaning the monthly note is even higher than the number you mentioned.
Prices overall are still up.
The problem is there are too many large corporate landlords who are buying houses with financial means not available to a normal person - allowing said landlord to bid higher than a normal person can.
This is a large part of the reason the prices are up and not coming down, in addition to the supply constriction among existing homes (normally 85% of the market) and limited new construction.
You say that lowering* interest rates will potentially free up the housing market. However, low interest rates are what allowed the recent housing bubble in the first place.
One thing doesn't invalidate the other.
and that's why this is a conundrum
They’ll go down but the fed rate isn’t going to 0 again anytime soon. 2 percent mortgages aren’t coming back, but 4-5 percent mortgages may push people to make the decision to upgrade their house and put their old one on the market
The main cause of the housing bubble was not interest rates but extremely lax lending standards, regulations, and enforcement. Banks create money when issuing loans. So if loans are made without much due diligence, that creates a credit expansion that is not sustainable and backed by productivity. Imagine giving an irresponsible 16 year old an unlimited credit card, yeah, not a good idea.
Good video! Wish you would do more videos like this👍
I'm hoping there will be a housing crisis so I can buy cheaply when I sell a few houses in 2025. As a backup plan, I've been thinking about purchasing stocks. What advice do you have for choosing the best buying time? On the one hand, I continue to read and see trading earnings of over $500k each week. On the other side, I keep hearing that the market is out of control and experiencing a dead cat bounce. Why does this happen?
Investing in real estate and stocks might be a wise choice, particularly if you have a sound trading plan that can get you through profitable days.
You're not doing anything wrong; you simply lack the expertise necessary to make money in a bad market. In these difficult circumstances, only really skilled experts who witnessed the 2008 financial crisis can expect to generate a large wage.
Recently, I've been considering the possibility of speaking with consultants. I need guidance because I'm an adult, but I'm not sure if their services would be all that helpful.
My CFA, Desiree Ruth Hoffman, is a renowned figure in her line of work. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market.
Thank you for this tip. I must say, Desiree appears to be quite knowledgeable. After coming across her online page, I thoroughly went through her resume, and I must say, it was quite impressive. I reached out to her, and I have booked a session with her.
As always, a masterclass
Great video, have been arguing with people that higher rates is preventing supply of housing and started questioning my position nicely to have you explain everything.
its quite depressing that we cannot get much needed capacity upgrades in home building, ports, energy, manufacturing etc because the fed kills demand before the capacity upgrade can be completed.
I’d contend that it’s not interest rates what prevents the housing supply to expand. The US (and Europe) saw bigger expansions of the housing supply with interest rates at higher levels
it's not the interest rates that are limiting the housing supply, it's the unnecessary red tape from the government. whether it be permitting requirements and/or zoning laws limiting supply and increasing housing costs, which would in turn incentivize the building of bigger and more expensive homes
Which are the result of incumbent homeowner NIMBYs voting down denser housing and public transit developments, in order to inflate their own home prices and maintain a selective “character” of their neighborhood.
It’s not as easy as low rates more housing.
Great video. Would love to see a video showing the difference in mortgage products between countries and the impact on monetary policy. From memory about 80% of USA mortgages are fixed rate 30 year, whereas other western countries like Australia, it’s about 80% variable. As a result, a change in interest rates has a far more rapid impact in aus vs usa.
Raising rates hardly matters for housing inflation if most of the cities are making it impossible to build the density required to increase supply.
Could you make s video explaining how the Stock market effect the economy
To tag on to the impact of increased housing costs on measured inflation, the other area where inflation is still strong is energy - where those energy providers are posting large YoY profit increases. Likely taking advantage of inflation expectations in the market...
Thanks for this high quality content ❤
10:25 U.S. owner's equivalent rent inflation is not calculated by asking people their hypothetical selling prices. Those responses influence the weight of owner's equivalent rent, but not what is actually in the price index.
Fyi...the last couple of months consumer spending has been falling. That alone is reason not to raise rates. Also, institution buyers in the real estate markets (like Blackrock) who pay cash for the houses they are buying up don't have to worry as much about mortgages.
"4 naans Jeremy?? Four?! That's insane!!"
We've gotten SOOOooo far away from the original definition of "inflation". The fact that lowering OR raising interest could cause 'inflation' in homes shows that the working definition is just useless. It's actually impressive how the original definition of "Too much money chasing too few goods" actually describes this scenario perfectly, meanwhile even as they keep redefining things they can't keep control of how prices are simply increasing faster than wages no matter how you try to define "inflation".
The problem with the original approach now is that all the money that’s not an actual paper money affects inflation the same way paper money does. And controlling this non-cash money i. e. various loans isn’t as simple as just controlling how much money you print.
This is why interest rates are important here - it affects how much loans and with which interest rates do banks give.
@@Carl-Gauss and the problem with your interest rate approach is that the fed doesn’t produce anything or set consumer prices anyways, so they can’t control supply regardless other than to hope and pray people are motivated by borrowing (and being productive with it).
Again, this dumb approach is how you end up with home prices being pushed up by lower AND higher rates. They can create fake demand but they can’t create fake supply.
How do you feel about using OER vs actual house prices? It's trying to get at "shelter" costs minus investment value, which is reasonable, but I feel misses some of the reason why people buy vs rent ie locked in payment, freedom to customize etc.
Instead of unlocking supply, lowering interest rates now will fuel demand for housing and speculation for housing price to rise even more.
Economic investigator Frank G Melbourne Australia is following this content cheers Frank
It’s hypothetical but it’s real because in America insurance costs are skyrocketing and so we homeowners correctly assume we would charge a higher rent in order to pay this real increase in insurance cost we are all paying.
Good sponsor
A small correction: many countries in Europe do include imputed rents for home ownership in their inflation indicator (CPI), this is true for example for the Netherlands. The alternative European inflation indicator HICP, does not include imputed rents for home owners.
The self fulfilling cycle seems like it would just be a temporary bubble. If people price their labor and goods at +8% but then the money supply is actually contracting, then the price is not supported by the fundamentals and sooner or later the price will collapse. I guess policy makers just do not want to risk a major collapse.
Agreed, been thinking about that.
Exactly. Basically everyone wants to run from a crisis not understanding/ admitting that there was way too much money printed this the inflation and we need a contraction
Inflation has almost nothing to do with money supply.
Only price and demand.
taxing should be brought to normal levels not interrest rates.. otherwise they feed the spiral towards crisis levels.. corp greed can only be halted if good tax rates are globally maintained and as such market fleeing isn't a real option either.
Moneysupply is one thing, and credit created by banks is another.
Hello. Recently Rieder from Blackrock made the case that lowering interest rates could drive inflation down due to the recent spikes being driven by services. I don’t know if it’s worth a video but I would like to think what are your thoughts on the subject. Thank you.
Oh, the same Blackrock that is gobbling up every stater home it can get its hands on? That Blackrock?
Interesting thought: if inflation is caused by demand outstripping supply, then hiking rates could have the opposite effect. Credit is typically needed to invest in additional capacity. This holds true for production in general, but especially in real estate. Eg in tight housing markets you highlighted in a previous episode, credit needs to be available for construction of new homes. A bit of a double edged sword if rates are hiked across the board...
The issue with the housing market is a supply issue. The majority of the housing market is secondary not new homes. So people will 3 or so percent don't want to see a significant increase in their mortgage note so they aren't selling. Limiting housing supply. Imo I don't give 2 shits about sticker price of large purchase items. Who cares if a car costs 40k instead of 50k if your final take home price is the same? Other items like food and what not are more impacted by feed stock prices (seed, fert, diesel, herbicide, pesticide, etc) those have been pretty high while food supply world wide had been reduced via Russia Ukraine. Interest rate will have little impact on that.
To be a successful business owner and investor, you have to be emotionally neutral to winning and losing. Winning and losing are just part of the game. Risk comes from not knowing what you are doing.
People dont understand that the prices of things are never going back down. This inflation is deeper than we think. Those buying groceries are well aware that the real inflation is much over 10%. The increments dont match our income, yet certain investors still earn over $365,000 in stocks and assets. Wish I could accomplish that.
Very possible! especially at this moment. Profits can be made in many different ways, but such intricate transactions should only be handled by seasoned market professionals.
Some persons think inves'tin is all about buying stocks; I think going into the stock market without a good experience is a big risk, that's why I'm lucky to have seen someone like mr Brian.
Finding yourself a good broker is as same as finding a good wife, which you go less stress, you get just enough with so much little effort at things
Sounds interesting. I was planning to invest some few £ in some coins, stack them up and leave them for a few years, but seeing this changed my mindset. Thank you very much
I honestly don't know that much about mortgages but could you not get a variable mortgage at current rates with the option to lock in temporarily at a future date when rates are more favourable? Also due to the effect of market pressures (high mortgage rates) on housing prices, that should theoretically get you a slightly cheaper price.
This is just refinancing with an extra step. I just bought a home at 7%, but I plan on refinancing in 2-3 years if rates go down. However, high rates in the short term still dissuade people from purchasing.
You help me understand the world that’s around me. Thank you.
Hi, do you give any weight to Stephanie Keltons argument that high interest rates can actually cause inflation not prevent it?
Yes some, see the case of the housing market. In general, I still think higher interest rates on average decrease inflation by limiting credit creation. I also told her this during the interview with her :)
there are 2 forces at play which is private debt expansion vs public debt expansion. Theoretically, higher interest rates may lower private debt expansion as people are less likely to borrow. That could be deflationary.
There is also the public channel. Increasing interest rates increases the yield of Treasury securities (lowering their prices). The interest expense paid to the security folders could increase the national deficit. The national deficit is an expansion of credit. If the debt is high, that interest expense could be high as well.
In this case, paying people and entities who hold government debt more interest than before. Rich getting richer. If those rich people end up spending, that could be inflationary.
But rental cost changes are almost immediate, mortgage costs depend on interest change mechism and any fixing periods. This is way more distributed over time and smears the feedback out. How does this not distort measurement? Do they control for this?
It is sad to see Summers going further off the rocker - trying to stay relevant and on the news circuit.
Canada should be looked at more often for videos like this. In recent times it's often the exception that proves the rule. On this issues there was actual inflation in addition to the shipping issues, the bank suggested businesses not increase employee pay, the housing price issue, among other factors.
Seems pretty sensible!
I dont get juggling in ECB..... I get US is a bit more straigthforward case by stats but EU is weird. Also council deciding those next in june have stated contrary views in public (ie some favor keep high, some lowering) which is weird for central bank representants.
IMO 5% is a good rate. When the rate is less, fewer people buy CDs. Banks have less money to lend for houses, cars, expending business,etc. If the rate is higher than 5% people cannot afford to borrow. Another problem is in financial emergence, if the interest is very low the fed has no where to go. IMO 4.5% to 5.5% is the most stable for our economy.
Unless you buy stock from a company, you're not adding money into the company. The higher the stock market the less money there is for banks to lend to companies.
The lower the interest rate the more money goes into the market. The more money in the stock market is less money for everyone.
I don't believe you have a very good understanding of how economics and the economy actually works. I would recommend picking up an economics textbook and reading it.
@@JayseabeeSTL As part of my engineering degree I was require to take two economic classes. I have found that most economists do not have a very good track record. I got out of the stock market in 2006 when most economists were telling me to buy. I later bought Ford for $2 a share. While some economists were saying Ford was dead. If you wish to discuss what I said was wrong. I a wait your reply, I may learn something.
@@JayseabeeSTL I'm not agreeing or disagreeing, but it is better to teach why he is wrong than to just say, "go read a book". The kind of thinking is how the movie Idiocracy becomes reality.
@@brucebarnes8138
1. “I took two economics classes.” - I could be wrong, but this sounds like you took two entry level economics classes in college to meet a minimum requirement for a non-economics degree, and probably a while ago at that. You say yourself you’re an engineer not an economist, so I’m not quite sure what the actual appeal to authority is, because you yourself admit you don’t really have any relevant authority’s on the subject.
2. “I have found that most economists do not have a very good track record.” - This is a very general and hasty generalization that I would love to see your evidence for, because I am not aware of any that supports it. Economists do tons of great work that has helped us better understand general trends and provided insights into certain behaviors, however, most economists do not claim to have some crystal ball that can predict the future 100% correctly, especially when dealing with something as complex as economic systems.
3. “I got out of the stock market in 2006 when most economists were telling me to buy.” - This is a personal anecdote and completely based on what economists you were listening to in 2006. Sure, the majority of economists were bullish in ‘06, but there was a vocal minority raising concerns about a potential housing and/or credit market bubble. Also, attempting to time the market has been proven to be a bad idea over and over again by an insane amount of academic research and back-testing. As the old adage goes: “Time in the market beats timing the market”.
4. “I later bought Ford for $2/share, while economists were saying Ford was dead.” - Cool, I’m happy that you were able to time one stock perfectly, but guess what? The S&P 500 as a whole has still by far outperformed Ford since both his their lows in 2008 during the GFC (Ford up 350%, S&P up 500%).
5. “If you wish to discuss what I said that was wrong, I await your reply.” - There was so much wrong with your initial comment that it’d take me an hour to fully explain it all, which I don’t have time to do, so here are the main points:
A) Lower interest rates do mean less saving via vehicles like CD’s, but this doesn’t directly correlate to less money for banks to lend out, because lower interest rates means banks have easier access to cheap money, meaning their customers have easier access to affordable loans, which stimulates the economy.
B) There was a 15-year period from roughly ‘76-‘91 where the fed funds rate ranged between 5% and 19%. That is to say, the exact point at which interest rates become too high and make borrowing unaffordable for the masses is unknown and depends on a wide variety of factors depending on the exact scenario. We had just grown accustomed to a low interest environment for too long so 5% now seems insanely high compared to very recent history.
C) I don’t get your assertion that the Fed has nothing left it can do if rates are low? The Fed always has the ability to enact QT (like it is now), as well as utilize forward guidance, as discussed in the video.
D) The assumption that 4.5%-5.5% is the most stable doesn’t take into account the fact that the economic system is essentially alive: always changing, always adapting, always needing to be responded to. Economics isn’t just so simple as saying “welp guys, Bruce on YT said 5% is the most stable, so let’s set it and forget it. Pack up and head home boys, we’ve solved economics 🤓”.
E) It’s true that only IPO’s and FPO’s contribute directly to a company via buying shares, but that’s a bit reductive as even buying shares after an IPO or FPO still indirectly contributes to and benefits the company by increasing liquidity, valuations, and availability of loans for further investment and growth.
F) Lower interest rates doesn’t mean less money for everyone, because the stock market and the economy as a whole are not closed systems, they are open systems with money constantly flowing in and out of them and between them. For example, low interest rates can lead to increased stock market investing as you stated, but you must also realize that increased stock market investing leads to increased valuations and increased liquidity (as I said in part E) which subsequently lead to increased company investment, expansion, innovation, etc. This process created jobs and promotes further economic activity, as well as raising household wealth via “the wealth effect” which in turn leads to increased consumer spending, feeding back into the same loop.
At the end of the day, you have to realize that economic systems are not simply black and white where 1+1=2. They are a highly complex network of micro and macro systems all feeding into and off of each other in different ways.
If you must know, I took AP Macro and AP Micro economics in high school in 2017, and took classes in college on economic principles, economic thought, and econometrics, in addition to my major in psychology and minors in statistics and political science. My best friend majored in mathematics and economics and just got his masters in economic development from Vanderbilt, and him and I discuss the topic together often. I’m no expert by any means, but I consider myself fairly well equipped to hold a discussion on the topic.
I hope you have a great day.
@@brucebarnes8138 Agree. Overly low interest rates (ie free money) only fuels bubbles. The so called neutral rate should always be around 4% or so, and then adjusted based on the situation.
Don't cut, instill discipline in the system.
Yet ceo pay is at all time high
Joeri I have a stupid question. Is there any effect of central banks paying high interest rates on bank deposits out of thin air? Meaning additional M1 being pumped into the system? Or is this a very small effect as interest is by definition a percentage? I never fully understood this.
Paying high interest rates on bank deposits (reserves) by central banks can have notable effects on the economy and money supply, but these effects are mediated through the commercial behavior of banks and the broader economic environment. The general idea is that when the central bank offers higher interest rates on reserves, commercial banks end up being incentivized to hold more reserves and not lend out as much money, thus decreasing the amount of M1 circulating within the economy.
Thanks. Theoretically, wouldn’t the banks (as an industry) ultimately earn more if they lent out more, thereby creating additional credit (=deposits) on which they could earn the central bank deposit rate? Effectively earning interest on 1) the original loan and 2) the additional deposit money created as a result of this loan?
You’re missing in your analysis the effect that investor purchases (both large and small investors) of real estate is having on the supply. In the past, pricing was driven up by investors. Now, if they start to sell there will be a crash. This is the worry many real estate investors have.
As much as I hate it, keeps interest rates high! But most importantly, ensure the EFFECTIVE tax rates of multimillionaires and billionaires are equitable!
Do you think recent tariffs on Chinese products are also contributing to higher domestic spending?
You don't see those effects immediately. Takes a little bit
Great Video. Intelligent, with no clickbait.
This inflation is transitory.... I already heard this one...
The higher rates also impact home builders, particularly on middle income housing, which is super scary. We need more homes ASAP and the homes not built today will cause more inflation and homelessness years from now.
Kind of weird timing for this video, considering Christine Lagarde anounced today that interest rates in the Eurozone will be cut on june 6th.
Yes. But, this video is about inflation and interest rates in the US.
keep rates high. alot of people locked in 30 year low interest rates mortgages so people still with low rates.
While I understand the rationale for Owner's Equivalent Rent and its potential utility, I really wish we had a way to make it less hypothetical. It's trying to measure something valid, but perhaps in a really shitty way
It means we need to tax the F out of corporations and stop the price gouging. It should not cost 8.58 for a egg and cheese biscuit meal at McDondalds. 2.00 for a hash brown is outrageous.
Breaking up monopolies and increasing competition is the only thing that will work to lower prices.
@@atomicfly777 There is no lower prices when all industries collectively raise them which is exactly what happened
What is the difference between inflation and currency debasement? And with all of the stimulus in the last few years, is it really the value of the dollar decreased rather than 'greedflation' or other causes?
Neat comparison as both end up with a unit of currency buying less goods or services. The difference depends on how strictly we define currency debasement, old school metal dilution in coinage or modern over expansion of money supply. At base I suppose the difference is Inflation is caused by many economic factors, including government actions while Currency Debasement is strictly a government/issuance issue.
Higher interest rates necessarily increase inflationary pressure from bonds, and bond payments come with no corresponding deflationary pressure from productivity because you are just paying people for having money in the bank.
The Fed wasn't wrong about it's transitory assessment; they simply didn't have fore knowledge of the multiple exogenous shocks that would hit the global economy - the next round of COVID variants that kept the workforce limited for longer, Putin attacking Ukraine, and some major weather events that hit commodities ..... those kept the inflation elevated for longer and were still transitory ... just over a longer period ... and it was long enough to let some effects get in to disturb the internal equilibrium - leading to the reasonable oscillating effects as economies slowly re-stabilize. Point is, the inflation turned out to be stickier, but NOT for the reasons Larry was stating at the offset.
@MoneyMacro
No. Its greed.
The horrible culture that misapplies market cap and growth.
Greed. Fulfilled by the practices of power, dominance and control.
Failure to discuss this is an obfuscation.
others are cutting rates, so when rates are kept constant, it automatically equals to lower REAL interest rates for the US but also lower inflation at the same time. because you get more demand flow into the dollar bonds AND the dollar. taking dollar up while taking bonds down
Thank you for the coverage of the US's hypothetical rental metric; this was a blind spot for me 😆It's one of those measurements that _feels_ inherently flawed and wrong, but when considered against alternatives (or ignorance) there is significant proof that there is value and utility of the variable.
Incredibly well made video/study! Thanks : )
Glad you liked it!
Can anyone provide an example where wages were raised in anticipation of inflation? Don't they typically lag inflation?
Yes yes!
Who is this economy actually booming for?? My stocks are going up sure, but food prices have doubled, gas prices have doubled, home prices have doubled, and my wages have stayed the same.
Can you please explain R* and the natural rate issues
They are determined to ignore the fact that inflation is being caused by corporate pirce gauging.
At this point i am convinced the housing market is just a bubble.
People are only buying homes with the increased equity from thier old home.
New buyers are not buying any houses at this point.
The problem with claiming it is a bubble is that there is a legitimate supply shortage. We may see prices correct as supply catches up but it’s unlikely we will see a quick drastic decline that would happen in a bubble popping
@@darthbumblebee7310 That is because the group that controls supply benifits most from the bubble.
@@darthbumblebee7310well time to ask the govt in west to start building flats? But I guess you guys love your suburbs
@@darthbumblebee7310it's feedback loop
Existing supply (~85% of the market) is down
New construction is up, but is only a fraction of the market.
The problem is prices are too high (not just interest rates). They jumped by 30-50%. The demand isn't just from normal people -- it's from flippers and corporate landlords too.
Some of that demand has subsided, but so has some of the supply.
It really is a bubble. Will it burst soon or will people just have to wait a decade for incomes to catch up is the question.
Your perspective is based on your surroundings. I’m in my 20s and have owned a home for three years. Most of my friends and colleagues my age have as well, or are in the process of buying now.
Does housing inflation drive other inflation because property costs feed into everything? (Property theory of everything)
It seems to me like the US is avoiding at all costs what it seems to be a well deserved recession. I do not expect the Fed to raise the interest rates or for Trump or Biden to lower spending to the degree necessary so I would expect inflation to persist for a long time.
Ye the idea that presidents magically control the economy ironically stops our government from taking responsibility for what controls they do have.
Jamie Dimon said as much, thinks the prime rate could hit 6% by year's end
Im glad you said workers were "promised" raises. Meaning, they dont actually materialize which is 100% true
Of course the market would not self correct. It's all because of fixed rates which would make no sense in a free market but the government has made them possible and thus completely messing it up. They caused a huge wealth transfer. It's the typical government action that is done superficially for a good reason but has unintended long term terrible consequences.
I wonder if his old video about how inflation was temporary, mostly a product of supply shortages and not increasing the money supply still holds. This directly contradicts the previous video. If demand can be set by rates, then money supply is a critical component. Also wage price spiral isnt real. Workers are always way behind the curve and respond to inflation, not the other way around.
No it's because government lied about the inflation rate. Where it was around %50 it was said %8-10. Now they are averaging it out with longer but still high rates.
Where do you live with 50% inflation? It's as expected here in Texas.
The government did not lie about inflation. The inflation rate is an average increase in prices across all sectors. If inflation is 10% that doesn’t mean that all goods are 10% more expensive. Some goods may be 40-50% more expensive while others may experience deflation and get cheaper. People tend to price and remember negative outcomes more strongly than positive outcomes. You are focused on the stuff that got more expensive and don’t remember or didn’t purchase the stuff that got cheaper.
@@dex6316 No the average is %50. At least for the things that matter to the %99
Private money creation is the root cause of inflation. Despite higher interest rates, you have very loose credit conditions. The ratio of LQD/JNK(basically a proxy for the Ted Spread - No longer available) has continued to decline. A very good example of private money creation are the crypto-assets.
Wrong. It’s greed in the private sector, especially in housing.
@@uhohhotdog Both are contributing factors. Both are ultimately more money chasing less goods. A big issue with our metrics right now is how the basket of goods and services used for CPI can have their rates of change be dramatically different from one another, yet we consolidate it into one number for inflation without any of the context for those individual goods and services.
@@uhohhotdog How is the private sector in housing NOT creating money privately through balance sheet expansion? You failed school. That’s ok.
@@effingsix3825 creating money doesn’t cause prices to go up. Greed causes prices to go up.
Japan proves it. But don’t let facts get in the way of your feelings
@@uhohhotdogbidding causes prices to go up (and down).
If you think people will pay 30% more for your television, then of course you will price it 30% higher.
That's not greed, that's business.
Cornering the market and raising prices, that's different.
Changing interest rates regarding housing wont change anything until flippers and corporate landlords are prevented from owning and buying homes
If you buy it, it needs to be your primary residence, you need to live in it at least a year before selling, and if you arent a person, you just cant have it.
This will help reduce the artificial demand from vultures.
Then lower rates can help unfreeze the market and lower prices.
As is, lowering the rates wont change anything because the demand will just shoot up (and will include the vultures)
Is there any increase to inflation with higher rates? Cost push inflation passed on to consumers, higher rates earned on bank deposits, and more interest income for those holding govt securities? Anything like that.
In the short term, yes, but in the long-term, which is what the fed cares about, not really. In the long-term, higher rates tend to lower demand and thus depress inflation.
Speaking of politicization of things, I REALLY appreciate this channel because you take such a neutral stance on things. I have my echo chambers, we all do, and I hear what they say reflected in what you say, but I also make an effort to go out of my echo chambers and see what the rest of the world is saying, so I'm used to hearing two different sides. What I get from your channel, so often, is both sides summarized well. It really builds my trust because I know if you draw a conclusion contrary to my own, it's not because you've dismissed or ignored the evidence that I'm seeing; it's that you've seen it, and other evidence and on the balance, with your greater information, come to a better conclusion, and then you walk me through that thought process so I can make up my own mind.
You really deserve ever sub you have. Thank you!
I often see it claimed that a good chunk of inflation is explained by high corporate profits. Is this accurate?
Basically, prices are always set for maximum profits. If you give everyone money, that optimal price goes up. Corporate greed can't explain inflation because it existed before 2021
I love how economists talk about inflation without highlighting how much they have changed the formulas (& items) since 1970. To give you a simple example, unemployment rate is at 3.9% but that's U3 not U6 which is far more representative (take a guess on why U3 is used instead of U6) not to mentioned shadow stats that try to use the same formula that was used in the 1970s.
Shadow stats are not calculated in a very good way. They say they use the old way of doing it. But, in fact, they just assume some additional inflation and add that to the inflation measure published by the Fed. It is an interesting discussion about inflation though for sure.
It's beyond interesting.
It's complex as hell. 👍
@@MoneyMacro Would love to see a video on this
@MoneyMacro thank you for the reply. BTW, I like your videos but inflation & unemployment is a very very complex issue & I know that the FED changed all formulas until they couldn't anymore to hide the catastrophes that was the oil shocks of the 1970s
Nobody talks about corporate price gauging when it comes to inflation. Corporations use the anticipation of inflation to raise prices unnecessarily. Even when their production costs are down and their profits are up, they still keep prices high. Higher interest rates will not fix corporate greed, which is why inflation is still high despite the best efforts of the Fed.
The only way this makes sense is if there's government intervention preventing companies from competing and undercutting each other and as resulting preventing the market from adjusting itself.
People who profit from higher interest rates always say we need higher interest rates. Funny how that tracks.
So, why isn't it in the FED's interest to fix the housing market?
Are high housing prices and high rates beneficial for the FED?
Point 2: why are other prices coming down? Decreased demand.....?
The first argument, that high interest rates are blocking the housing marked does not make any sense to me... or may be I am wrong and people who sell their houses will just choose to become homeless.
Nah, people will just NOT sell at all. Because buyers will not accept high prices given they will have to finance them
As long as fractional reserve lending exists, the banks will continue to print money out of thin air and inflation will continue. Compare 1970s prices to today. The dollar then is worth a dime now. Thing is, in order to pull infinite profit from a finite market, you must devalue the currency. The purchasing power goes down, but the numbers get ever larger, and that looks great on the books.
The housing market is a lagging indicator. If rates get cut the the housing market will drop in value due to sellers being secure in moving despite a potential drop in housing value
Nothing related to the video, but I have seen some econoboi videos, starting from the old ones, and they don't seem reliable... am I wrong? If not do the more recent ones get more consistent and with better information? (I'm talking more specifically about the global social democracy one)
Perhaps just build more affordable houses.
What about the uncontrolled deficit in the US ? That adds to inflation.
I remember watching one of your videos Dr. Joeri, where it was mentioned that one possible way to cool down inflation was to introduce some kind of mandatory savings scheme
What do you think of such a proposal? Right now whenever interest rates are increased, that just benefits the banks and not the public at large
Instead of increasing rates by say 3%, the savings requirement can be increased. That'll take out money from the economy while still maintaining its ownership
We already have that it is called Social Security.
Increase in house values does mean higher taxes for homeowners. Even if you arent going to sell in the next decade. Vervloek het idee van WOZ waarde.
That's because inflation isn't the increase in prices, it's the expansion of the currency supply.
As a homeowner I feel like rising interest rates have meaningfully reduced the amount I could get for my home while being completely ineffective at changing the amount I would require to even consider selling my home, maybe even increasing it as it also drove up mortgage costs and alongside rents followed. Both people around me and myself now claim higher rents and fewer home buyers means selling seems more difficult I probably couldn't get what I want for my house but higher interest rates have not in any way reduced the amount I'd require to consider selling and maybe even increased it. Just because nobody can afford a mortgage doesn't mean prices come down it has very much just meant that you can't sell.
Also rising rates have very much changed my perspective on loans and interest rates I will never in my life for any reason take a loan that doesn't have a fixed interest rate for the entire life of the loan if it's a 30 year mortgage it has to be fixed for 30 years or I'll just do without it. Taking a loan with an undefined interest rate at any point in time is singing a deal with the devil.
We should expect a very deflationary period, because AI, robotics and automation will disrupt almost everything, as we move towards UBI and Era of hyperabundance.
Macro guys look at macro data and miss the point. 1 - housing. Housing housing housing. That should be like 70% of your basket of goods when calculating inflation these days. And it's F'ed regardless of interest rates. 2 - during the pandemic every company at the same time realized the can raise prices, a lot, and cut services and quality. Why would they stop? Combine that with increased trade war with China ans cheap stuff disappears. So what you have is out of control inflation.
First and foremost, fix housing. There's a ton of solutions. Do them all. Secondly strengthen unions and labor. Workers generally gave no bargaining power these days save for a few select industries. Third, severely restrict stock buy backs and start enforcing anti-monopoly laws again. Inflation will come down in 5 years if that happened.
I can think of a lot of reasons to strengthen labor power, but bringing down inflation is not one of them. Can you explain?
@@MRJP there's plenty of examples of countries with strong labor power that don't have out of control inflation, Switzerland comes to mind, but I think you're right they're probably very poorly correlated. We should still do it tho.
Unions are inflationary as they are a monopoly on labor which seeks protectionist and anti-immigrant policies which restrict the supply of labor and goods.
Can you make a video on the fiscal theory of the price level and invite John Cochrane on your podcast?
I thought we had it under control because I was watching the currency in circulation return to post covid levels of increase. But I didn't realize the debt... yep inflation is locked in. Good thing im slightly on this side of the growing line.