Young families trying to raise kids, working two sometimes three jobs, should be thanking Jerome Powell for tackling inflation aggressively.
Morgan Stanley analysts determine national home prices.
By Morgan Stanley’s calculation, the monthly payment on a median-priced home is up 27% over the past year.
Of course Powell is worried about hard working young adults and thats why he’s raising interest rates.
The FED has 3 goals, but they have a certain order of priority. Low inflation makes maximum employment possible. Low inflation plus maximum employment lead to moderate interest rates. So, the primary goal of the FED is low inflation.
People might need to delay buying a house for a few years, but had over 10 years of extraordinary low mortgage rates.
Monetary Policy: What Are Its Goals? How Does It Work?
“The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Even though the act lists three distinct goals of monetary policy, the Fed’s mandate for monetary policy is commonly known as the dual mandate. The reason is that an economy in which people who want to work either have a job or are likely to find one fairly quickly and in which the price level (meaning a broad measure of the price of goods and services purchased by consumers) is stable creates the conditions needed for interest rates to settle at moderate levels.”
As one who lived through the '70s and '80s as a young adult, I would say yes. Inflation hurts everyone. If the Fed weren’t working to get inflation under control then it could continue to rise more.
Of course, if you are a national office holder you may be blamed (think Jimmy Carter) and left holding the bag.
DB2
Almost laughable. The main issue at the last open market comittee was the strong job market. The feds main concern was “cooling off” job growth.
It’s also more than obvious who the Federal Reserve is concerned about: their friends at “Bankers&Brokers” incorporate. When mulit- millionaires and billionaires were about to lose their shirts at Silicon Bank, the high risk venture capital associates, the Treasury at the urgency of the Federal Reserve stepped in to cover losses. And why were there losses? Oh that’s right, because of the bond markets dropping the foor out because of the Feds policy combating inflation.
But… if you’re a hard working class young family. The answer?
Awww too bad, maybe just loose your new house and wait a couple years to get back in your own home.
Right?
Low inflation is the first goal at the FED. When there is low inflation, the FED will try to get maximum employment. When there is high inflation, the FED will raise interest rates.
Maybe some of the long cherished beliefs about inflation are wrong. The Fed has one tool and that’s raising interest rates. The Fed’s only tool actually increases inflation i.e., monthly payment on a median-priced home is up 27% over the past year.
Thank you feds… Maybe there’s another way around inflation other than the golden cow 2% or die. And how does the Fed usually contain inflation? Massive unemployment and deflation.
That usually is paid for by average working class Americans in tremendous hardships.
Your summaries are very good. Let’s also add that the FED can directly affect inflation rates but can not directly affect labor participation. The FED can only make the business environment better.
Fiscal policy is making the business environment better as well. That has been resisted since 2008.
Actually, the Federal Reserve’s dual mandate doesn’t say that at all; and especially true if you give priority by order of statement:
a dual mandate pursuing the economic goals of maximum employment and price stability
Nothing there states priority unless you give priority by chronilogic order.
The influence of the FED foremost is on stability. Not just price stability but corporate, labor, and political stability.
maximum (employment and price) stability
The biggest flaw another country can have is the political leader taking over the central bank. That leads to instability.
The most economic pressure we can face as a nation is inflation or deflation. The FED’s priority has to be price stability. There are constant pressures to increase the money supply.
Only one of those pressures does us a lot of good economic growth. We are in a period when we will be able to unlock a lot of real GDP growth.
That is why we have a problem in DC. We have to embrace a new set of economic ideas. In 2022 many laws passed to do just that. We still need major funding of a national electric grid program.
It doesn’t say that.
a dual mandate pursuing the economic goals of maximum employment and price stability
NB: the word " dual"
It means that. It is about political and economic stability.
In other words, optimizing the US economy. Something we have not done from 1981 to 2020.
The statement is not exclusive of the determinants. It is inclusive of all factors and results.
It does not say it, no. It does not mean something that is not stated. You’re applying your own belief to make it mean something it does not say i.e., that the mandate of the Federal Reserve’s charter is to maintain employment stability. It does not say that at all.
Now, if you believe that that Should be the goal of that Fed, Great!
But… that’s just your opinion. And… You should own it.
I agree. Congress set some general goals with no specific details. The FED has filled in the details needed for consistent monetary policy. Congress through hearings and new laws can let the FED know if new direction is needed.
I am just repeating what I remember from FED press conferences: the 2% inflation goal is firm, low inflation is needed to get maximum employment, there might be short term pain (higher unemployment, higher interest rates). This is what the FED is saying and doing: inflation must be under control for the economy to function well. Some of this is trying to anchor inflation expectations at a specific number of 2%. People know that they can expect 2% raises and 2% price increases every year.
There might be better monetary policy. Since 1948, U.S. inflation (averaged over 10 years) was usually between 1% and 4%. There was inflation above 4% between 1968 and 1988. Maybe an inflation range of 1% to 4% would give more flexibility to achieve the other FED goals.
| from | to | inflation | CAGR |
|---|---|---|---|
| 1953.09 | 1963.09 | 1.3 | |
| 2008.09 | 2018.09 | 1.4 | |
| 1948.09 | 1958.09 | 1.7 | |
| 1958.09 | 1968.09 | 2.0 | |
| 2003.09 | 2013.09 | 2.4 | |
| 1993.09 | 2003.09 | 2.5 | |
| 2013.09 | 2023.09 | 2.8 | |
| 1998.09 | 2008.09 | 2.9 | |
| 1988.09 | 1998.09 | 3.2 | |
| 1983.09 | 1993.09 | 3.7 | |
| 1963.09 | 1973.09 | 3.9 | |
| 1978.09 | 1988.09 | 6.1 | |
| 1968.09 | 1978.09 | 6.6 | |
| 1973.09 | 1983.09 | 8.3 | |
| average | 3.5 | ||
| median | 2.9 |
I would like to see more stable interest rates. Unstable interest rates have caused bank failures, and make planning difficult. Anyone lucky enough to lock in 3% mortgage a few years ago, is now discouraged from selling because they would have to buy a new house with a 8% mortgage.
I think QE was a mistake. QE was an effort, in times of very low inflation, to boost the economy. Now with QT, the economy is booming, and so the effectiveness of QE is questionable. QE did encourage more risk taking, and changed the economy. For example, some corporations were taking out zero interest loans and buying houses.
=== links ===
Why does the Federal Reserve aim for inflation of 2 percent over the longer run?
“By seeking inflation that averages 2 percent over time, the FOMC will help to ensure longer-run inflation expectations remain well anchored at 2 percent.”
The curious history of the Federal Reserve’s 2% inflation targeting, explained, Feb 20 2023
“It took until 2012 for the U.S. to declare its 2% inflation rate target.”
Oh I do own it.
How do you think we get employment and price stability without…
My druthers is we optimize the US economy. I do not consider supply-side economics to be economics. Congress said “pursuing economic goals”.
Supply-side economics does not pursue economic goals.
If you discuss a single supply side econ policy it seems all of them were shot down by Samuelson’s math as backward and destructive.
During Reaganomics early on unemployment rose. The discussion of the talking heads was this is a new normal rate of unemployment. Garbage double talk for not meeting the FED’s mandate.
I think you’ve got cause and effect backwards.
One school of thought is that inflation is a monetary phenomenon. When there’s too much money in circulation, inflation is the result. There’s certainly evidence for that in this most recent bout of inflation. All the covid stimulus money was quickly followed by inflation. Increasing interest rates is a result of that inflation, not the cause.
—Peter
The bond market collapse is the effect of the Fed’s increase in the interest rates.
I suppose you have another cause that would apply here.
I’m not sure how you separate out the effects of the supply chain disruptions. Used car prices didn’t increase dramatically because people had a check for $1000. They went up because manufacturers were constrained from producing sufficient new cars (chip shortages) and people had little alternative but to buy used. “More demand”, not “more money”.
I’m not saying “more money” didn’t have an effect, surely it did, but I’d argue it was dwarfed by the product shortages and manufacturers seeing an opportunity to increase prices because their competitors couldn’t get product on the shelves, or just because they could.
Increasing interest rates is a both a natural and artificial result. It’s natural because people on the “fixed” side want better returns to compensate for future risk, and artificial because the Fed is proactively pushing rates higher in order to get ahead of those future risks of devalued money.
I think this was a big part of it … knowing they could get away with raising the price because the price of everything was going up and thus raising them to make more profit.
The money supply causes inflation. The money supply includes credit.
When there is a shortage it is the excess money that allows prices to rise.
It is not the only tool.
There is also taking money out of the system. So that first tool is a double-edged sword.
Interest rates going up cuts how much borrowing happens which in turn cuts the money supply.
The reason Covid matters in this has to do with responsibly adding to the money supply. Usually, the inflation will be mild. Covid had other needed responsibilities for the public at large.
Monthly payments are not up (primarily) because rates are higher. Payments are up because HOME VALUES are higher. Increasing interest rates will help to reduce home prices.
Median home prices went from 322k in 2020 to 479k in just two years - the fastest increase in history at over 48% - far outpacing nearly every other inflation rate. Thankfully, the increased interest rates have helped to bring that down to $416k.
If not for the downward pressure of rates on home values, that 479k would likely be over 500k today.