Rates up, rates down, I'm so confused. Too much liquidity supposedly means inflation, too little liquidity means deflation. Would not lower rates mean more consumer spending, thereby injecting more spending and fluidity in the system?
I can't help but shake the feeling that the federal reserve is here for the wealthy, the bankers, and not for the rest of us, and anything they do is ultimately not for our benefit, but for theirs.
the feeling that the federal reserve is here for the wealthy
In a sense, the disconnect between these two things is also the explanation. The behavior of consumers is not directly coupled to the fed rate. What you or I do with our money won't change if the rate goes up or down a percent, because we just don't have enough money for it to make a difference to our daily life.
But it often takes a loan to start a business. And when the bank is considering who to make loans to, higher fed rates mean they need to charge more interest, which means riskier business proposals don't get funded. Conversely, if the fed rate is low, then the only way for banks to make money is by making loans, so there's more money available, which tends to both increase inflation and decrease unemployment.
The fed has two jobs (keep inflation at ~2%, and unemployment no higher than 5%) and one lever to accomplish both. It's not so much that they only care about the wealthy, but rather that their only tool needs to percolate through the wealthy before it affects us.
The behavior of consumers is directly coupled in a few ways. However most of what consumers buy is things they would anyway. I'm going to buy a new house this year if I can help it - I locked in my low interest rate several years ago - but if something happens I might be forced to. Most of my spending is no going to change. I'm going to eat, and that comes from my paycheck not from a loan. So long as the cost doesn't go up by more than my raises I'll keep paying for my kid's violin lesson.
Most of the changes from high interest rates are indirect to me. Because rates are up my company is selling less product - our customers have to pay for loans and in turn that means some of them decide to keep/maintain an old product that they would replace if the cost (mostly interest rates, but we can also play with our price) was a little less. In turn this means that my cost of living raise this year was pretty bad (didn't meet inflation), so I've been forced to cut something small (or take from savings).
Now I do have friends who were laid off because of the economy and having trouble finding a job. As always things are worse for those people.
The problem is interest rates are the only large lever they have, but changing this lever changes a lot of things at the same time. Some of those changes are good, other bad - they need to figure out the best compromise, but there is always good and bad with every position of this lever. Most of the things that happen as a result of the lever (including leaving it in the same place) take time - sometimes years - to work out.
Lower rates does increase spending. However it does this by adding money: inflation - which in turns makes prices go up. So in the long run this makes things worse despite the short term gain. This is just one part of the full consideration, there are lots of other effects from any interest rate that they need to work out.
I think you've got the cause and effect backwards.
If X dollars buys 1.2 times more stuff in the future (deflation) you will hoard your dollars and deprive the economy of them.
If X dollars buys 0.8 times more stuff in the future (inflation) you will buy things now and make investments.
The Fed isn't optimizing for people wanting mortgages today, it does controlled burns to try and prevent medium-term calamity. Look up the Volker shock, where rates were hiked beyond 20% to trigger recessions because inflation was above 10%.
I can't help but shake the feeling that the federal reserve is here for the wealthy, the bankers, and not for the rest of us, and anything they do is ultimately not for our benefit, but for theirs.
Because that is what's happening. Our economy is fractured after years of catering to the wealthy at the expense of the working class (anyone who finances their life via their labor.)
Yes. If costs are up AND profits are up or steady, it implies that the squeeze is being felt by consumers rather than by the large companies seeing profits. To me that implies the issue is a lack of competition, itself largely due to failure to enforce existing antitrust laws. It's hard to fix monopolization with interest rates.
Part of the _profits are up_ is synthetic while the squeeze is real.
Tariffs are one of the culprits. The invalid taxes people paid are not going back to them but to the companies that sold the products and services.
Price of goods are not going down after tariffs were invalidated. Majority of companies are keeping the same price point. It is extremely rare for companies to lower it. [0]
Rich keep getting richer and everyone else keeps getting poorer.
You're making a lot of strong assertions for someone who acknowledges they don't understand pretty basic concepts in macroeconomics.
Would not lower rates mean more consumer spending, thereby injecting more spending and fluidity in the system?
If managing the economics of a country was as simple as recognizing a relationship like, "when we move this number up, then things get better," then we'd be living in a utopia.
If you want to assert that the Fed isn't helping the average citizen, then go ahead and join the large group of people who have been suggesting this the whole time. But if your basis for such an assertion is that you can't comprehend why a decision like raising or lowering interest rates isn't simple, then do yourself a favor and just step away from even trying to understand what is happening here.
I can't help but shake the feeling that the federal reserve is here for the wealthy, the bankers, and not for the rest of us
Kashkari was part of the minority opinion. The Fed voted to keep rates steady, so I guess that means that the Fed is against the wealthy, bankers, and for the rest us?
It turns out that having lots of money is useful, including at taking advantage of the macroeconomic landscape. In a high interest rate environment, you get free money from yields. In a low interest rate environment, you get free money from leverage.
The Federal Reserve is one of the last competent parts of government. You don't blame the ER doctor for atrophy caused by being hooked to a ventilator after getting a heart attack caused by consuming only fast food. The ER's job is to keep the patient alive by making sure that oxygen is circulating well enough for the body alive. Likewise, the Federal Reserve's job is to make sure that money circulates in a way that keeps the economy alive. It's not their fault if the voters vote for politicians who enact terrible policy.
Comments
Rates up, rates down, I'm so confused. Too much liquidity supposedly means inflation, too little liquidity means deflation. Would not lower rates mean more consumer spending, thereby injecting more spending and fluidity in the system?
I can't help but shake the feeling that the federal reserve is here for the wealthy, the bankers, and not for the rest of us, and anything they do is ultimately not for our benefit, but for theirs.
In a sense, the disconnect between these two things is also the explanation. The behavior of consumers is not directly coupled to the fed rate. What you or I do with our money won't change if the rate goes up or down a percent, because we just don't have enough money for it to make a difference to our daily life.
But it often takes a loan to start a business. And when the bank is considering who to make loans to, higher fed rates mean they need to charge more interest, which means riskier business proposals don't get funded. Conversely, if the fed rate is low, then the only way for banks to make money is by making loans, so there's more money available, which tends to both increase inflation and decrease unemployment.
The fed has two jobs (keep inflation at ~2%, and unemployment no higher than 5%) and one lever to accomplish both. It's not so much that they only care about the wealthy, but rather that their only tool needs to percolate through the wealthy before it affects us.
The behavior of consumers is directly coupled in a few ways. However most of what consumers buy is things they would anyway. I'm going to buy a new house this year if I can help it - I locked in my low interest rate several years ago - but if something happens I might be forced to. Most of my spending is no going to change. I'm going to eat, and that comes from my paycheck not from a loan. So long as the cost doesn't go up by more than my raises I'll keep paying for my kid's violin lesson.
Most of the changes from high interest rates are indirect to me. Because rates are up my company is selling less product - our customers have to pay for loans and in turn that means some of them decide to keep/maintain an old product that they would replace if the cost (mostly interest rates, but we can also play with our price) was a little less. In turn this means that my cost of living raise this year was pretty bad (didn't meet inflation), so I've been forced to cut something small (or take from savings).
Now I do have friends who were laid off because of the economy and having trouble finding a job. As always things are worse for those people.
The problem is interest rates are the only large lever they have, but changing this lever changes a lot of things at the same time. Some of those changes are good, other bad - they need to figure out the best compromise, but there is always good and bad with every position of this lever. Most of the things that happen as a result of the lever (including leaving it in the same place) take time - sometimes years - to work out.
Lower rates does increase spending. However it does this by adding money: inflation - which in turns makes prices go up. So in the long run this makes things worse despite the short term gain. This is just one part of the full consideration, there are lots of other effects from any interest rate that they need to work out.
Inflation is bad, we have high inflation due to the energy crisis, the treatment for high inflation is increasing interest rates.
I think you've got the cause and effect backwards.
If X dollars buys 1.2 times more stuff in the future (deflation) you will hoard your dollars and deprive the economy of them.
If X dollars buys 0.8 times more stuff in the future (inflation) you will buy things now and make investments.
The Fed isn't optimizing for people wanting mortgages today, it does controlled burns to try and prevent medium-term calamity. Look up the Volker shock, where rates were hiked beyond 20% to trigger recessions because inflation was above 10%.
Because that is what's happening. Our economy is fractured after years of catering to the wealthy at the expense of the working class (anyone who finances their life via their labor.)
Yes. If costs are up AND profits are up or steady, it implies that the squeeze is being felt by consumers rather than by the large companies seeing profits. To me that implies the issue is a lack of competition, itself largely due to failure to enforce existing antitrust laws. It's hard to fix monopolization with interest rates.
Part of the _profits are up_ is synthetic while the squeeze is real.
Tariffs are one of the culprits. The invalid taxes people paid are not going back to them but to the companies that sold the products and services.
Price of goods are not going down after tariffs were invalidated. Majority of companies are keeping the same price point. It is extremely rare for companies to lower it. [0]
Rich keep getting richer and everyone else keeps getting poorer.
[0] https://www.tomshardware.com/pc-components/cooling/pc-coolin...
You're making a lot of strong assertions for someone who acknowledges they don't understand pretty basic concepts in macroeconomics.
If managing the economics of a country was as simple as recognizing a relationship like, "when we move this number up, then things get better," then we'd be living in a utopia.
If you want to assert that the Fed isn't helping the average citizen, then go ahead and join the large group of people who have been suggesting this the whole time. But if your basis for such an assertion is that you can't comprehend why a decision like raising or lowering interest rates isn't simple, then do yourself a favor and just step away from even trying to understand what is happening here.
This is just rude, the poster clearly is asking for more information and isn't claiming to be an expert.
Kashkari was part of the minority opinion. The Fed voted to keep rates steady, so I guess that means that the Fed is against the wealthy, bankers, and for the rest us?
It turns out that having lots of money is useful, including at taking advantage of the macroeconomic landscape. In a high interest rate environment, you get free money from yields. In a low interest rate environment, you get free money from leverage.
The Federal Reserve is one of the last competent parts of government. You don't blame the ER doctor for atrophy caused by being hooked to a ventilator after getting a heart attack caused by consuming only fast food. The ER's job is to keep the patient alive by making sure that oxygen is circulating well enough for the body alive. Likewise, the Federal Reserve's job is to make sure that money circulates in a way that keeps the economy alive. It's not their fault if the voters vote for politicians who enact terrible policy.