Fed Stands Still Despite 7% Inflation And 3.9% Unemployment (Taylor Rule Suggests Almost 18% For Target Rate, Fed Stays At 0.25%)

Confounded Interest ^ | 01/26/2022 | Anthony B. Sanders

[Browns Ultra Fan]

Despite inflation growing at 7% (versus The Fed’s target rate of 2%) and U-3 unemployment being only 3.9%, one would have thought that Jay and The Gang would have started increasing rates at the January meeting.

But nooooo. The Fed actually sat on their hands and did nothing.

What did The Fed say?

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agencymortgage‑backed securities by at least $10 billion per month.“

According to The Fed Funds Futures data, the market is anticipating 1 rate increase at the March FOMC meeting. And another at the June FOMC meeting.

The Taylor Rule (not used by Jay and The Gang), suggests that The Fed should have their target rate at almost 18%! NOT 0.25%.

The Fed stands still.

[Browns Ultra Fan]

The Fed is protecting Biden and Democrat held Congress.

[BushCountry]

Yep, they abused the Trump Presidency.

[LibertyWoman]

This may sound like a stupid question, but how does continually raising interest rates combat inflation? I've never understood that concept. I lived through the Carter trainwreck where inflation was out of control along with the interest rates. Raising them never did anything but make everything more expensive.

Anyway, if someone could perhaps explain this, I'd really appreciate it.

[Williams]

Omg

[JoSixChip]

Simply put, higher interest rates means there is less easy money. That means less money chasing a limited supply of products. Producers will have to work to attract buyers and that means more attractive pricing.

[1Old Pro]

As interest rates are increased, consumers tend to save because returns from savings are higher. With less disposable income being spent, the economy slows and inflation decreases. Also less borrowing at higher rates so less spending. Also potential decrease in money supply.

[Harpotoo]

So why are mortgage rates so high?-)

[Lurkinanloomin]

They can’t raise rates.
Doing so would cost Fedzilla huge amounts in debt service.

[lodi90]

And crash the booming housing market 2008 style.

[Renfrew]

Think of buying a house.

If interest rates are at 1% you can get a 30 year mortgage for $3200 per months. Lots of people will be able to afford that, bidding wars start over that house and the price goes up.

Interest rates go up to 10%, and now the mortgage is $8000 per month. Far fewer people can buy the million dollar house. Demand drops, pushing down the price of housing.

[Lurkinanloomin]

2.98% is not high.

My first house had a rate of 11.5%

[alstewartfan]

Beck will reveal the real unemployment and inflation stats tonight, based upon old gauges of measuring those indicators. So said Glenn on his radio show this morning.

[TiGuy22]

but how does continually raising interest rates combat inflation?

If rates are high, borrowing will be less. If borrowing is less, then demand will drop as there’s less buyers. If demand drops, then prices will stop going up, and perhaps down.

Think of housing, if rates go up sellers will have to lower prices because less people will be buying.

[ClearCase_guy]

Inflation + Unemployment = Misery Index

But I don’t expect that term to be used, and I don’t expect honest numbers for Inflation.

[sphinx]

Doing so would cost Fedzilla huge amounts in debt service.

This.

If interest rates were pushed to where they should be, we would be borrowing/printing a couple of trillion dollars a year just for debt service.

This is called "bankruptcy."

Aka the Argentine tango.

[Harpotoo]

Lending rate is .25.

How many times is your rate multiplied from there? All I see is banking Profit.

.50 return is 100% profit:-)

[Freedom4US]

They can save the dollar, or they can save the stock market, but they can’t save both. The dollar is the unit of account. They raised interest rates very high back then, to save the dollar. The overnight FED rate - was maybe 15 per cent. But they can’t ever do that again, not even close.

The entire debt of the national government rolls over about every 4 years. Nominal or historical rates of say 3 or 5 per cent would crater government finance, because literally every dollar of revenue would be allocated to simply paying the interest on government debt. There wouldn’t be anything left to pay for government. The numbers are difficult to comprehend, but even a 1/4 point rise in the interest rates mean unfathomably large increases in the debt service.

Nobody expects government to “pay off the debt”, they don’t do that, and they never planned to. And at 30 Trillion and counting, that isn’t possible.

But, they have to make timely interest payments on the debt.

[Toddsterpatriot]

The numbers are difficult to comprehend, but even a 1/4 point rise in the interest rates mean unfathomably large increases in the debt service.]

An instant increase of 0.25% across the board would cost about $75 billion. Unfathomable?

[Toddsterpatriot]

Lending rate is .25.

You want to borrow overnight to write a 30 year mortgage?

[Antoninus]

They can’t raise rates. Doing so would cost Fedzilla huge amounts in debt service.

Bingo. If interest rates go up, service on the national debut would, at some point, consume the entire federal budget. Even a slight uptick could cause a gigantic financial meltdown.

My feeling is that something akin to hyperinflation is headed our way.