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About those Fed rate hikes . . .

This is just a quick reminder:

The first big rate increase from the Fed was in May, and they didn't start pushing through 0.75% increases until June. Since it takes roughly a year for rate increases to feed through into the broader economy and bring down inflation, the current round of increases will start to take effect around May of next year. Given a few other factors, however, I'd put it at around February or so.

In other words, everything that's happened until now has been unrelated to the Fed's actions. It all would have happened anyway. The Fed hasn't been "fighting inflation," it's been working to choke off economic growth in 2023.

35 thoughts on “About those Fed rate hikes . . .

  1. sfbay1949

    "Since it takes roughly a year for rate increases to feed through into the broader economy and bring down inflation, the current round of increases will start to take effect around May of next year. Given a few other factors, however, I'd put it at around February or so."

    I'd like to know how we know this. Is it common knowledge?

    1. joey5slice

      We don’t know this. No one knows how long it takes for monetary policy to work.

      The idea that the rate hikes have done nothing so far is pretty laughable. The entire residential real estate industry has seen a massive downturn. Financial conditions have changed dramatically. There have been big layoffs in tech. People’s spending patterns have changed in response. These things have helped slow inflation. How much? No one knows, but they definitely have happened, and they definitely have had an effect.

      Kevin’s brain is completely broken when it comes to inflation. He has absolutely lost the thread.

      1. Austin

        “These things have helped slow inflation. How much? No one knows, but they definitely have happened, and they definitely have had an effect.”

        Except that allegedly the big worry about the current bout of inflation was all about household costs. Food, energy, etc. How does making home and/or car purchases more expensive help bring down the cost of meat, gas, etc.? Doesn’t making home and/or car purchases more expensive simply mean that more people stick with the homes and cars they already own, since those prices are fixed? (Neither your existing traditional mortgage nor your existing car loan payment goes up when interest rates go up… they’re all locked in from whenever you signed the paperwork.) And doesn’t making new home purchases more expensive simply lock renters into renting longer, at a time when all the rent control devices we employed during the pandemic have been allowed to expire?

        If I didn’t know any better, I’d think that the raising of rates is simply the upper class seeking to keep the poor and middle classes locked into continuing to spend whatever they were spending before 2021, and not allow any of them to take advantage of the small wage increases they were able to secure in 2020-21. Hmm.

        1. joey5slice

          "Except that allegedly the big worry about the current bout of inflation was all about household costs. Food, energy, etc. "

          This isn't true. Costs have been rising across the board. Food and energy are excluded from "core" inflation measures, and these measures, while not as high as the headline numbers on an annual basis, are still far too high.

          "If I didn’t know any better, I’d think that the raising of rates is simply the upper class seeking to keep the poor and middle classes locked into continuing to spend whatever they were spending before 2021, and not allow any of them to take advantage of the small wage increases they were able to secure in 2020-21."

          I'm glad you do know better, because the opposite has happened. Inflation hits lower earners the hardest. It is inflation that has been a scourge on working people, and attempts to rein in that inflation that are protecting working people. Owners of capital have seen their portfolio values drop by 20% or more this year. Meanwhile, it is only wages at the lower end that have kept up with inflation. If you actually asked people who work for a living and live paycheck to paycheck, they'd tell you that inflation is the problem, not higher interest rates.

      2. MattBallAZ

        I love Kevin -- have been reading him forever.
        But yeah, he has gone around the bend on inflation. I think all his predictions that were so far off has caused him to double down.

    2. Tom Hamill

      Agreed. Kevin, you're a data-driven guy for the most part, so present some data to back up your case, rather than such ex-cathedra arguments.

    3. lawnorder

      Among economists, the existence of lag is fundamental. It's just common sense that "things take time". A great deal of work has gone into quantizing lag, and the general consensus is that it takes about a year for changes in federal economic policy to work their way through the economy. Naturally, some effects happen sooner than others. To the extent that the Fed can be predicted, you may see leading edge effects on, for instance, the stock market even before the Fed actually moves, but it takes much longer to affect the economy as a whole.

    4. DFPaul

      Krugman has been writing frequently recently about the research on the "lag" and citing studies which make it accepted and well-established, "common knowledge" among economists, I guess you could say.

    5. Lounsbury

      No, this is Drum's assertions and partial understandings of more complex interactions and econometric observations in re reference rates
      - there is certainly a delayed feedback effect on the mechanical / contractual feed throughs of reference rates via dependent rates (directly dependent and indirectly dependent) - one can see this immediately in rates that are benchmarked off of CB ref rates, lending rates, borrowing rates that are floating immediately start moving up.
      - there is as clearly immediate effects from market actors seeing such rates and (a) adjusting private rates ahead of actual financial-contractual feed-through; (b) adjusting expectations - as in spending, based on cost of funds, lowered expectations.

      His observations are partial truths based on incomplete understanding of the financial econometric observations (overly simplistic understandings) and of course motivated reasoning as he's been trying to poopoo inflation for going on two years, getting it fundamentally wrong. And is incapable so far of admitting the error.

    1. Austin

      Bingo. For as much as commenters here say that raising rates has helped get inflation more under control, there’s no explanation of how making it more expensive to borrow money for new homes, cars, credit card spending, etc. actually causes things like groceries, gas, etc. cheaper. Just a lot of hand waving about how “well if people aren’t able to buy a house, the real estate market will simmer down and then… somehow… consumer goods that everyone’s been complaining about all year will also become cheaper.”

      Few voters were bitching about the cost of mortgages or car loans going up when they were bitching about the cost of gas going over $5 or the cost of meat going up. Yet somehow, instead of imposing price controls on the things people were bitching about, or giving people government-funded vouchers to buy those things at discounted price, or heavily taxing and/or nationalizing rapacious corporations bringing in record profits, or really any number of things that government has done in the past (usually during war) when supply vs demand for consumer goods got out of whack… we’re on a path to make housing and cars more expensive to buy and hope that that somehow kills demand for consumer goods.

        1. kaleberg

          Weird. I don't remember any shortages in 1971, at least not of consumer goods. There was a shortage of jobs, but that's another story.

      1. Lounsbury

        Oh brilliant the Lefty Left wants to completely replicate all its policy errors of the 1970s.

        And regain the horrible reputation it had then.

  2. jdubs

    The first order effects are mostly through home construction employment and new homes take 7-8 months to complete, maybe a bit longer currently.....so the construction industry should see the first effects in January or Feb and continue to decline through the summer and fall.

    Here is a Fed Reserve analysis stating that interest rate increases take about 2 years to reach maximum impact.
    https://www.stlouisfed.org/publications/regional-economist/january-2003/monetary-policy-the-whole-country-gets-the-same-treatment-but-results-vary

    1. Jerry O'Brien

      Thank you. The article you linked to refers to a paper by Carlino and Defina. I found a 1998 revision of it at https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/1997/wp97-12.pdf

      They were looking at personal income effects after a policy shock, and though the maximum effect came after eight quarters, the change began to show up in the third quarter after the shock, and reached more than half of the maximum effect by the sixth quarter after.

      If we were going to apply that estimate to the present situation, I'd put the policy shock in December 2021. The paper talks about an unanticipated increase of one percent in the federal funds rate, and we know that 2022's rate increases were not unanticipated at the time they went into effect, but were pretty much laid out in statements by the Fed in the preceding December.

      So we should already be seeing an effect of the monetary policy shift, and we should expect to see increasing effect from it for the next five quarters.

  3. D_Ohrk_E1

    With no small amount of irony, nominal GDP will slow, but because inflation has flattened, real GDP will look like it has rebounded.

    And what will you say then?

    I will still be here telling you the value of paying attention to what nominal GDP is doing, so as to not let exogenous (and therefore transient) inflation trick you into making poor choices.

  4. Dana Decker

    Kevin's assertion that "everything that's happened until now has been unrelated to the Fed's action" is puzzling. If Kevin was the Fed, he'd have done practically nothing up to now. And "now" is a past year of 8% inflation.

    If he really believes "it takes roughly a year for rate increases to feed through into the broader economy and bring down inflation", what's the course of action? Why raise rates at all since the next twelve months are unpredictable and maybe inflation will subside, seems to be his approach.

    Remember, throughout 2021 Kevin was adamant that there was no inflation on the horizon. Repeated posts showing 2nd order regression [!] to "prove" this-or-that metric was anomalous or not an indicator of inflation. Yet inflation came to town, and in a big way. He has not, as far as I know, explained why his analysis was incorrect.

    As far as the here and now, talk to poor people (without capital/real assets that cushion the blow) and you'll discover they are suffering big time. Especially with food.

    1. Austin

      How does making housing more expensive to buy lead to food becoming cheaper for the poor that you’re allegedly so concerned about? I don’t think there are enough real estate agents or mortgage brokers we can throw into poverty that would dent food purchases enough to force supermarkets to sell food cheaper before it spoils… after all, food is one of the last things people cut back on, because you know people die if they don’t eat every so often… but that seems to be the theory behind “raise rates charged for mortgages —> food will become cheaper.”

    2. jdubs

      Often you don't have the ability to improve a situation given the tools you have available.
      The Fed can't affect the supply disruptions in cars, the worldwide labor force, food production or petroleum products......but they do have tools to throw people out of work in the construction and manufacturing industry.
      It's hard to admit that you can't improve a situation and we do often see terrible management decisions that force people to suffer in order to give the appearance that the people in charge are doing something serious....but that doesn't mean the Fed should hurt the economy and wage earners in a futile attempt to fix the supply problems.

      If poor people are suffering, throwing them out of work isn't going to help.

  5. frankwilhoit

    Not "to choke off economic growth". Not to create " a bad economy in the year before the next presidential election". Their intent is to create a labor surplus. Last time's methods may not work any more.

  6. NeilWilson

    The headline rate of CPI is YEAR over YEAR inflation.
    Monthly inflation started getting bad in January 2021 and was terrible through June 2022.
    Inflation has been quite tame starting in July.
    It is easy to predict that the year over year inflation number released next July will be very good BECAUSE it substitutes June 2023 for June 2022.

    Core CPI is also all messed up because so much of it depends on the change in rents that people pay.
    So rents are going to be on a step increase for a long time too. Most people don't have monthly leases, they sign 12 month leases. Rents are probably going down now but the Core CPI still showed an increase because rents on leases signed in October 2022 were higher than on leases signed in October 2021.

    None of this is rocket science. It should be easy for the media to explain.

    And none of this has anything to do with the timing of Fed rate increases. The massive rise in rates will slow things down. They HAVE slowed things down. If rates stay level, they will CONTINUE to slow things down. The hot topic is how fast all these factors work together.

    You can make a lot of money in the market if you bet that 5 year inflation will be much above 2.4% and you are correct.

  7. golack

    As others have noted, there are immediate effects. It's just that the full effects on inflation take time....a quick overview.

    One of the immediate effects was to bust the crypto bubble--at least a bit. One knock on effect of that was to free up computer chips and eventually chip production for other things.

    Stock prices dropped--mainly on fears of future recession? A lot of stock prices were...way over their skis. That meant people's retirement funds decreased and "wealth effect" went away, so they'll spend less now. Also, investors subsidized the costs of rides and food delivery services to build market--but that has mostly stopped now, though more or less ended before big jumps in rates.

    Mortgage rates went up almost immediately. That raises the cost of housing while lowering the sticker price. That also means people have less money to spend on other things.

    Had some effect on oil prices. Mainly affected futures contracts as people fear a recession causing a drop in demand. Possible effects on current prices as oil storage facilities unload what they have while prices are still high. Of course war is Russia and actions of oil cartel main drivers too.

    OF course Fed actions do not affect bird flu pandemic nor drought in Western US--so basically no effect on food prices.

    1. Austin

      Allegedly though, the two things that voters were pissed the most about this year were the cost of food and the cost of gas. So what you’re saying is we’ve chosen to go down a path that won’t necessarily lead to either food or gas getting cheaper (because the causes behind why food and gas got more expensive haven’t stopped and because people really can’t cut their food or gas budget by much if they want to live).

      That sounds about right for America in 2022: choosing the path that won’t solve any problems (and will create new ones) because it’s the only politically possible path to go down.

      1. golack

        What--you'd expect the Fed to shift course if there was a red wave???

        Climate crises will not be solved immediately by anyone. At least Joe finally go the ball rolling. Water rights in the west need to be redone--growing alfalfa in the desert is a bit absurd. Again, this administration is trying to get the states to do something--it is controlled by a compact amongst states.

        In the mean time, costs will go up unless production is shifted elsewhere.

        As for bird flu. The only thing to be done is to wait for this wave of infections to pass. It's cheaper to cull flocks than to inoculate them--which is a sad state of affairs.

  8. rick_jones

    Hell hath no fury like a pundit who’s lost cheap money.

    Props however for seemingly dropping the pretense it is one person at the Fed controlling rates.

  9. Bob Cline

    Others noted some of the immediate effects, but my non -expert understanding was that one of the most important effects was "sending a signal" that the Fed was serious about stopping inflation. It seems that psychology is a big factor.

  10. middleoftheroaddem

    "In other words, everything that's happened until now has been unrelated to the Fed's actions."

    Incorrect. You are placing zero value in the signaling impact of the Fed. Recall folks trying to read the tea leaves from Bernanke's cryptic speeches: words alone, from the Fed chair, can have immediate economic impact.

  11. raoul

    Of course the Fed rates increase have a lagging impact, anybody who argues the opposite is being shill. Just about everybody agreed that rates should have gone up to redress a bout of moderate inflation and inflation indeed has stopped being an issue - (electoral politics has something to do with this)- the problem is that the majority of the rate increases occurred the last four months and a half when inflation was already abating and we are yet to feel the impact of those rate increases.My estimation is that the rate increases have been markedly higher than the rate of inflation after the ebbing and that will have substantially impact on GDP.

  12. pack43cress

    Pardon my ignorance, but I can't help but think that there are flaws in the notion that raising federal fund rates can affect the prices of everything. When there is complete freedom of action, the ivory tower notions of money supply and commodity supply/demand principles might produce the desired effect. But... can anyone actually explain to me how fed rates could affect the price of gasoline? If the population wants to drive gas guzzlers, they're going to pay the price-gouging penalty and then just scream bloody murder. I'm not sure the high price of gas actually makes demand go down enough when all of our products move across the country by truck.
    As for money supply, that is an economists' calculation by formulae that have no inherent validity, just theory. Sophisticated, for sure, but still just theory. How does the massive income and wealth inequality in this country warp those ivory tower theories about desired effects from tweaking the "money supply"? I don't think the formulae were developed during years of extremely concentrated money in the top 1%. Increasing borrowing rates gives the wealthy a different way to increase their private supply of money which sits in investments and doesn't play a role in overall market supply/demand when considering total economy money supply. They loan their money at higher rates.
    In short I think the classical notions about money supply and the overall economy are based on an unconscious assumption that the total supply of money in the economy is reasonably distributed across the whole population (reasonable, not equal). The oligarchs have jammed up the system.

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