Tag: interest rates

The ‘Experts’ Were Never Going To Fix Inflation

Mary Pat Campbell

Link: https://reason.com/2022/10/27/the-experts-were-never-going-to-fix-inflation/

Excerpt:

Debate now rages about whether the Federal Reserve should continue to raise interest rates to tame inflation or slow down these hikes and see what happens. This is not the first debate we’ve had recently about inflation and Fed actions. The lesson we should learn, and I fear we won’t, is that government officials and those advising them from inside or outside the government don’t know as much as they claim to about the interventions they design to control the economy.

As a reminder, in 2021, the dominant voices including Fed Chairman Jerome Powell asserted that the emerging inflation would be “transitory” and disappear when pandemic-induced supply constraints dissolve. That was wrong. When this fact became obvious, the messaging shifted: Fed officials could and would fight inflation in a timely manner by raising rates to the exact level needed to avoid recession and higher unemployment. Never mind that the whole point of raising interest rates is precisely to soak money out of the economy by slowing demand, which often causes unemployment to rise.

…..

Over at Discourse magazine, my colleague Thomas Hoenig—a former president of the Fed’s Kansas City branch—explains how Fed officials faced similar pressures during the late 1960s and 1970s. Unfortunately, he writes, “Bowing to congressional and White House pressure, [Fed officials] held interest rates at an artificially low level….What followed was a persistent period of steadily higher inflation, from 4.5% in 1971 to 14% by 1980. Only then did the [Federal Reserve Open Market Committee], under the leadership of Paul Volcker, fully address inflation.”

Often overlooked is Volcker’s accomplishment: the willingness to stay the course despite a painful recession. Indeed, it took about three years from when he pushed interest rates up to about 20 percent in 1979 for the rate of inflation to fall to a manageable level. As such, Hoenig urges the Fed to stay strong today. He writes, “Interest rates must rise; the economy must slow, and unemployment must increase to regain control of inflation and return it to the Fed’s 2% target.” There is a cost in doing this; a soft landing was never in the cards.

Author(s): VERONIQUE DE RUGY

Publication Date: 27 Oct 2022

Publication Site: Reason

Interest Rate Hikes Will Make Climate Change Worse

Mary Pat Campbell

Link: https://jacobin.com/2022/10/interest-rates-climate-change-liz-truss-tories

Excerpt:

Raising interest rates won’t just push Britain into a recession and make the cost-of-living crisis worse for working-class people — it will discourage badly needed investments in green energy, undermining the UK’s efforts to address climate change.

….

The theory goes that higher interest rates help bring inflation down by making credit more expensive across the economy and reducing the amount of money firms and families have to spend on goods and services, thereby slowing price increases. But our inflation is predominantly driven by external factors, most notably high gas prices resulting from COVID-19 supply issues and the war in Ukraine. Instead, the bank’s policy is likely to push the UK economy into a recession, without addressing the main underlying causes of rising prices. That also means higher costs of borrowing for the very investments we need to reduce our reliance on costly fossil gas, like wind farms and home insulation.

To compound the problem, higher interest rates discourage investment in clean projects more than dirty ones. Running renewables doesn’t cost much: they rely on free wind and solar energy instead of expensive fossil fuels. But building them in the first place does come with high initial costs, meaning they are particularly impacted by the higher costs of credit. Similarly, insulation and heat pumps need to be paid for up front, before they begin to lower energy bills for households. Demand for improvements like heat pumps is significantly influenced by the availability of cheap loans to cover the initial installation costs.

Author(s): LUKASZ KREBEL

Publication Date: 23 Oct 2022

Publication Site: Jacobin

Interest Rate Hikes vs. Inflation Rate, by Country

Mary Pat Campbell

Link: https://www.visualcapitalist.com/interest-rate-hikes-vs-inflation-rate-by-country/

Graphic:

Excerpt:

To understand how interest rates influence inflation, we need to understand how inflation works. Inflation is the result of too much money chasing too few goods. Over the last several months, this has occurred amid a surge in demand and supply chain disruptions worsened by Russia’s invasion of Ukraine.

In an effort to combat inflation, central banks will raise their policy rate. This is the rate they charge commercial banks for loans or pay commercial banks for deposits. Commercial banks pass on a portion of these higher rates to their customers, which reduces the purchasing power of businesses and consumers. For example, it becomes more expensive to borrow money for a house or car.

Ultimately, interest rate hikes act to slow spending and encourage saving. This motivates companies to increase prices at a slower rate, or lower prices, to stimulate demand.

Author(s): Jenna Ross, Nick Routley

Publication Date: 24 June 2022

Publication Site: Visual Capitalist

Cathie Wood’s Open Letter to Fed Draws Snark

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/10/11/cathie-woods-open-letter-to-fed-draws-snark/

Link to letter: https://ark-invest.com/articles/market-commentary/open-letter-to-the-fed/?utm_content=224025663&utm_medium=social&utm_source=twitter&hss_channel=tw-2398137084

Graphic:

Excerpt:

Ark Invest founder and CEO Cathie Wood is drawing snarky comments on and off Twitter after posting an open letter to the Federal Reserve challenging the central bank’s aggressive interest-rate hikes.

Wood published the letter on her firm’s website Monday as her ARK Innovation ETF (ARKK) sustained more blows in a year that has seen its returns slide more than 60%. Bloomberg reported Tuesday that the fund, which has fallen more than double the S&P 500′s decline, was down about 11% over three days.

Wood voiced concern the Fed is making a policy error that will lead to deflation and said it seemed to be basing its decisions on two lagging indicators: employment and headline inflation from official reports such as the Consumer Price Index. These variables “have been sending conflicting signals and should be calling into question the Fed’s unanimous call for higher interest rates,” she wrote.

Author(s): Dinah Wisenberg Brin

Publication Date: 11 Oct 2022

Publication Site: Think Advisor