Prediction: this causes a recession in two years, right after a Democrat wins the White House, who will be blamed for it. The economy will turn around after a few years, just in time for a Republican to win and claim they fixed it.
This is how Republicans have a reputation for being economically savvy despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
A 0.25% rate hike is going to cause a recession? How, exactly, would that happen?
Honestly it seems your post is heavy on politics but I am not seeing an actual argument anywhere in there.
My canned response to people being upset at various policies or ratios, whether it is inflation, or bond yields, or market movements, is to ask them what they think the correct value should be. Stop complaining about the movement and instead ask them for their target. You think a 4% FedFunds is too high or too low? What do you think the correct value is and why? You think the stock market is too high or too low, what do you think the correct value of the index should be?
Most people, who were just moments ago vociferously complaining about a movement, when asked this question fall silent, because they have no idea what the target should be, and because they have no idea about the target, they really have no business complaining about movement. Instead, they use the movement as a springboard to air their ideological beefs. But if you are going to tie some thesis to a rate hike, you better be able to explain what you think the correct rate should be and why. I'm waiting.
Personally, I think a 4% rate is perfectly fine. 5% may even be warranted, and historically this has not been a high rate, if you assume, say, 2.5% inflation and 2% GDP growth, this is a pretty reasonable place to be.
> is to ask them what they think the correct value should be
This is Hacker News, we should understand what a PID controller is.
The economy is the "plant". The variable of interest, inflation, is the output of the plant. The government interest rate is the input. As inflation varies around the target FOMC rate, the Fed adjusts the rate. If inflation is over 2%, we should expect rate hikes, regardless of what the current rate is.
This is a fairly simple and very effective system that has worked in most Western countries and the Eurozone since the 90s.
However, note that the "recession" claim is also partly correct: the reason rate hikes work to reduce inflation is that they move the economy growth rate down, in the direction of (but not necessarily into!) recession.
Bond prices shooting up is a result of market losing trust in US, or it's ability to not default.
Dollar is famous backed by $700T military. But the world has seen how it failed to secure a strait.
The current US government has broken all kind of promises. I want to highlight two in particular - free trade and immigration.
World economy has benefited for decades on the promises of free trade. The tariffs have eroded the promise and trust.
The government is also openly supporting elements who are hostile to immigrants. Immigrants are the backbone of US economy, has been for over hundred years. Immigrating to the US requires years of preparation, long term planning, and giving up on other luxuries and opportunities. When the government starts breaking promises by changing rules and moving the goalposts overnight, it discourages participation.
>My canned response to people being upset at various policies or ratios, whether it is inflation, or bond yields, or market movements, is to ask them what they think the correct value should be.
Maybe find a better canned response? US debt has never been higher, and because of this even rates that are below historic highs can cause economic chaos.
I dunno about the politics, but personally I don't think there is a generic "correct" value. The rate describes the state of the world, and the "correct" value is whatever accurately describes the state of the world.
There is a separate question though - is that state of the world good or bad for people? Is it better or worse today than it was yesterday? What can we do - collectively - to push it in a direction that best serves our collective interests? These are valid questions to ask, and I think each takes us further in the direction of politics.
At this point its probably more like 12% temporarily because the more correct way to measure it is to take the 1980s inflation measure (from before all the medelling to make it artificially lower) and raise rates by 25 bips every quarter until that number is zero, then back it off slowly
> A 0.25% rate hike is going to cause a recession? How, exactly, would that happen?
I didn’t see anyone claim a single 25 bps hike will cause a recession.
The 30 day FFR futures (/ZQ) curve is pricing in an 80% chance of two more hikes by the March 2027 meeting and a 70% chance of 3 or 4 hikes by Sept 2027’s meeting. So, 50 bps predicted in the next 6 months and 25-50 bps more within one year.
What results? Overnight interbank loan rates, yes, immediately. The effect of those rates on the economy? It will take time to propagate. Heck, some important committees only meet like twice a year.
Another possibility is recession in next two years, but its brief enough that recovery starts before 2028 election - republicans take credit and voters believe it - JD Vance gets elected president.
I recall reading something from axios or similar, talking about how a CEO said a "nice light recession right now would be perfect for us" or something to that effect.
And which party controls congress? I'll give you a hint: It's the party that spent decades advocating for irresponsible tax cuts without cutting spending[0].
[0] Yes, I know that the Republicans said that they were going to cut spending to match the tax cuts, but that never ends up happening.
The BBB, Iran war, and tariffs, something done solely by republicans, sometimes just the president, are the source of inflation, so you can attribute this situation mostly on Trump, and fully on republicans.
I think this could be the thing that finally pops the AI circular financing bubble, leading to World Depression II. I'm not sure either of the existing 2 faces of the duopoly infesting politics will survive, and there's a non-zero chance this breaks civilization as supply chains collapse, and we enter a new dark ages.
This is very, very unlikely. The US would probably suffer more, given how much AI related expenditure there is. The EZ mostly wouldn't notice, and China is already basically in a depression that it's desperately trying to export its way out of (which seems unlikely without them doing something about all the underwater property debt).
> Prediction: this causes a recession in two years
"this" (raising the fed rate by .25%) is not what causes a recession in 2 years, it's what led to "this" (the ill-advised, badly-planned, Iran war) + tariffs + popping AI bubble that will do that.
One of the more baffling things in the most recent version of that cycle was Biden being solely blamed for inflation - in particular the finger pointing over checks exactly like the ones that went out under trump.
But not doing this would, in two years, cause (or at least allow) inflation that would cause harm, too. But Trump might get blamed in that case, because inflation would increase for the next two years, and so people would experience the pain during his term.
At what point into a presidential term does it become their actual mess? And is there evidence of a time delay? Because by that argument, the mess we are in would been caused by Democrats.
Usually, months to years. The economy is a very big ship and slow to steer.
This particular crisis is quite abrupt, caused by a sharp jump in the price of oil. Most presidents don't really deserve either the credit or fault that they receive on the economy, but in this case there's a very clear and direct connection.
There's not a constant cutoff. It depends a lot on what the president and the administration do. Does the president push the button and start nuclear war? They are the primary driver for the new economy. Does the president continue the same policies that were working for the last decade and continue to work for the length of their presidency? They might never be the primary driver.
Arbitrarily decided by the person with political convictions blinding them.
Yes, it happens to both sides. People convince themselves their side always makes right decisions, the other side always wrong.
The truth is that the secret sauce is in the pendulum going back and forth. The excesses of one side are soon erased by the other. It is working, as it has for many years.
> This is how Republicans have a reputation for being economically savvy despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
And it's how Democrats have a reputation for being the "wrongly victimized underdog / misunderstood savior" despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
It bugs me that the Fed has no mechanism to really deal with supply-shock driven inflation. Prices are shooting up, but not strongly correlated to money supply at the moment. They’re shooting up because there are a dozen or more entirely capricious and totally self-inflicted supply-shocks due to bizzaro tariff “policy”, disastrous military adventurism, and general erosion of the USD the prime vessel for international trade.
The Fed tightening the money supply isn’t going to materially bring prices down, because the money supply isn’t driving the price increases.
> the Fed has no mechanism to really deal with supply-shock driven inflation.
Inflation is just a change in the ratio of money to stuff. You can reduce inflation by increasing the stuff or reducing the money, and cause it by doing the opposite. There's no requirement that the solution is applied to "the same factor", either works.
Sure, if you're wanting to assign blame or worried about externalities these things start to matter. But monetary policy is a perfectly fine tool for dealing with inflation, regardless of the cause.
Note: inflation causes prices to rise, but that doesn't mean that all changes in price are caused by inflation.
You’re describing only one flavor of inflation. What the Fed is supposed to care about is price stability, and lots of things influence prices, and not all of them are money supply and/or new money supply correspondent.
We saw this during COVID, the prices of things shot through the roof because of a combination of supply-chain shocks as well as the already well capitalized seizing the opportunity to spend their war chests locking down as much of the available supply as possible, which resulted in consolidation, which resulted in less available supply.
The random trade wars directly cause goods to cost more for absolutely no good reason whatsoever, it’s just a tax masquerading as a price increase, but the Fed deals in stabilizing prices, not taxes. So, it changing the money supply parameters does nothing.
The weakening of the international trade position of the USD writ large also causes prices to go up for no good reason, and nothing about that is going to be resolved by the Fed fiddling with the money supply parameters because it has to do with the stability and reliability of the U.S. as a trustworthy geopolitical operator, which the Fed can do next to nothing about.
The inflation being experienced as price instability/increases is being induced acutely by terrible fiscal & trade policy, but the Fed is acting to try to “fix it” using monetary policy, which won’t work at all. So, what’s the point? Just to look like it’s doing something?
The net effect is demand destruction. The US shouldn't be exporting diesel when it lacks sufficient refining capacity to make up for all of the capacity destroyed or unavailable from the US war of choice with Iran. And as the price of US domestic diesel goes to $6+, oil demand is going down both because there's insufficient refining capacity and there's a general slow down in the economy from the added inflation baked-in by higher oil prices and higher diesel prices.
> It bugs me that the Fed has no mechanism to really deal with supply-shock driven inflation.
I mean, what would that actually look like? The Fed is insulated from democratic accountability, for very good reasons, but flipside of that is that their powers are intentionally limited. If they had the same immunity to public opinion but with the power to address supply shocks, that would quickly veer into tyranny.
It's a careful balancing act and there is no perfect solution. What's supposed to happen is that Congress acts on supply-shock driven inflation, but this current Congress would rather eat a bag of broken glass than actually govern, which the Fed can't really do anything about.
What it would look like, at the barest minimum, would be the Fed rightly and with receipts calling out the fact that they’re a monetary policy function, and that the current inflationary problems aren’t a monetary one, so if the U.S. would like something done about its inflation issues, then it needs to look someplace else besides the Fed to deal with it.
It doesn’t have to do anything to monetary policy when monetary policy isn’t the problem. It can do nothing.
It’s not the Fed’s job to try to fix terrible fiscal & trade policy, but that’s now what it’s basically trying to do. So, it’s become a political function by virtue of the political apparatus offloading the consequences of its idiocy onto the Fed to clean up after it with a set of tools that can’t even actually do the job.
Yeeep, inflation right now is not a monetary phenomenon. There's also general corporate greed and ever-increasing monopolization, helped out by Trump's lax regulatory hand
Interest rates rising aren't going to fix these sources of inflation.
> inflation right now is not a monetary phenomenon
It usually isn't. That doesn't change that raising rates should slow down credit creation a bit. That reduces demand in a supply-constrained economy. It also reduces risk appetites, which helps in a perilous world. (Finally, it gives rate-cutting headroom for when someone levered blows up.)
Unfortunately, during that time is when they screwed around with the gold confiscations. So the best option would have been to illegally hoard gold until they struck the statute down?
The US is going to debase itself endlessly through spend-print-spend-print. At some point they may load up enough debt that the economy suffers a gradual heat death, in the style of Japan, wherein too much of your national capital is going to debt maintenance, sitting in a low yield blackhole sucking the dynamism out of your system (instead of going to productive use, business expansion, R&D, et al).
There's absolutely nothing particularly interesting or special about the direction the US is going. It's very, very, very easy to see what's coming and has been for ~20 years (since Bush nearly doubled the size of the Federal Government and blew up our finances with simultaneous tax cuts + massive spending expansion, we've never turned back from the bleed).
Gold has gone up ~10x since the early Bush years precisely because of the USD debasement, that's the reduction in value in the dollar being represented in the ultimate store of value. All of it has been remarkably predictable. I've been chirping about it forever here and there's nothing special about my insight either, this stuff is plain as day national econ 101.
i know what you mean. 2008 and covid taught me to stop underestimating the abilities/nerve of our financial schemers and their political representatives to kick the can down the road. but i am too anxious about it to think straight. what to do?
The turning point is approaching: Interest rates will gradually overtake all other gov't expenditures. All politics will revolve around shoring up the parasitic drain on the rest of absolutely everything.
The country - particularly this industry, information technology - got addicted to cheap cash. Worse, people didn't want to pay any of it back in tax, so bond yields are going to go up on the debt that was issued to cover deficit spending.
Should be interesting to see how this impacts the AI hyper-scalers. They were already burning through cash like a furnace and were running out of people to borrow from, thus the IPO hopes.
To be honest though cash hasn't been cheap for a while, not really since 2021. We have been in relatively high interest rates for the entire AI boom. Going from 350-375 to 375-400 won't be a huge shock for hyperscalers. Interest rate are still lower than when many made their initial investments in 2023-2025
>Should be interesting to see how this impacts the AI hyper-scalers. They were already burning through cash like a furnace and were running out of people to borrow from
looks very similar to 2007-2008 - high rates plus an wide economy segment with very large debt. Now, the interesting question - did anybody "too large to fail" do (or got exposed in some other ways to) leveraged CDS on the hyperscalers bonds and private debt.
Edit: Whoever the hell flagged this lol....people were complaining the parent comment wasn't helpful so I took time to write a thoughtful response with citations. You can't win around here.
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The counterintuitive part is that a lower Fed rate doesn't necessarily mean cheaper borrowing for the government. The Fed sets an overnight rate; someone lending for ten years cares about inflation and interest rates over those ten years. Keeping short-term rates low won't necessarily reassure that lender. [1]
It also helps to distinguish the government's debt from a giant credit card. Existing fixed-rate bonds keep their agreed interest payments. Higher borrowing costs feed into the budget as old debt matures and gets refinanced, and as new debt is issued. The pain accumulates rather than arriving all at once. [2]
Nor does a larger interest bill automatically require "printing money." Treasury borrowing and Fed money creation are separate decisions. [3]
The difficult question is how to contain inflation without causing more economic damage than necessary. A large debt load makes that tradeoff more expensive; it doesn't make either option painless.
I thought bumping up the prime rate slowed consumer spending. But the recent price hikes are because supply is hosed (oil, tariffs), not that demand has been bidding up prices. So how is this supposed to help?
It doesn't matter whether it is a supply shock or a demand shock, the correct response to inflation is to raise rates, which reduces economic activity and in this situation the reduced activity reduces demand for oil, which is what is needed in an environment in which we have less oil than normal.
Although it is the third world that is going to take the hit, the wealthy nations will bid up the price of oil to ensure they continue to get it, the poorer nations will be priced out. What is an annoyance in the west -- say needing to delay a major purchase or postpone a vacation or reduce expenses - translates to famine and deindustrialization in the global south.
Maybe it's not such a good idea to be waging war against major resource exporting nations, the US and Europe are now sanctioning about half of the global resource exporting nations, and the only benefit of this is higher prices in our domestic economies and China coming in to sign trade deals for discounted Russian and Iranian oil.
KSA also needs to lay off the Houthis and lift the embargo, it's long past time that they give up trying to control who runs Yemen.
I mean, if predicting market behaviour was that simple, I'd be very rich by now. This is another unique moment, the beginning of the end of an empire possibly. Some unusual things are going to happen and it'll be tricky to predict reliably.
Best thing we can hope for here is Trump sees an obvious way out of this: return the economy to a predicable machine, reduce spending, tax the ultra wealthy, and ditch tariffs. But I don't think much of that's likely to occur.
We're in unchartered territory in many ways. Good luck.
Oil is going up, possibly for a long time, which will have a big inflationary effect on everything. And it appears the USA government has lost the conflict it started and effectively given control over key oil delivery channels to Iran. Not to mention Saudia facing real issues from rebel groups / Yemen (simplification).
Government debt is high in several key economies, and the bond market is being saturated with AI-related bonds, as well as possibly people finally tired of lending the USA/France/UK money at low rates and demanding higher ones. And with higher interest rates and bonds rolling over it means more and more money going to pay for the debt, rather than core services.
Wild cards lurking in the bushes... AI, AGI, RSI.
And yonder you have a nuclear power floundering; its only source of hard currency is being rightfully degraded, and its leadership delusional.
And the one to watch IMO... Russian wheat export ability: wheat prices are up considerably, and combined with inflation from oil, this is the kind of stuff that creates waves of political change like the Arab Spring.
This is the right move. Inflationary pressures due to high oil prices and tariffs are not going away anytime soon. All the economic numbers point to a need for a rate hike. Not doing so has a much larger effect on the financial system than a 25 bps rate hike. Stagflation is a bigger risk to the economy.
Counterintuitively the rate hike can help lower things like mortgage rates by stabilizing the bond yields.
I don't think that mortgage rates are going to go down; I think they will go up. Just my opinion.
I also think oil is about to go up even more, maybe for multiple years, which is going to be inflationary on everything we do. But, could be really good for solar growth, electrification, and electric cars.
We'll continue through the depression we've started since 2008. (GDP growth should be closer to 3.5%-5%, but we haven't really escaped sub-2% since 2008) - our GDP has been depressed by at least 1-2% growth since that crisis, and I think a large part of it has been the inflationary cycle we started and never stopped.
The wars already put us into too much debt, Obama continued it for 8 years (granted, the deficit slowly went down, but it wasn't fixed). Trump and Biden did a huge disservice to the debt (but neither really cared much about it), and now I fear the path Bush, Obama, Trump, and Biden have laid will not be easily fixed.
Inflation is high, so interest rates need to go up to try to slow that, but the economy isn't doing amazing already, and higher interest rates won't help that.
Not to mention the US debt is _high_ as hell and bond yields mean that's more expensive.
And the country is run by a broken fool who has no interest or ability to fix any of that.
Higher rates means financing/borrowing is more expensive. Mortgage rates will go up, possibly pushing home prices down. This is neutral for buyers because of higher rates, but bad for sellers. Loans (personal or business) will be harder to come by. Layoffs, or at least hiring freezes, are more likely. Companies will move into a defensive rather than an growth mode. Higher unemployment will lead to more desperation, and possibly consumer defaults on loans and mortgages.
Government interest payments, which are already high, will become higher after future bond sales. This will compound future budgetary problems and could eventually lead to cuts in entitlements. If so, expect crime and political instability (already a problem) to rise in the future. This will take a while, though.
Normally rates are increased to lower inflation by reducing the supply of money. Given the multiple concurrent problems with energy (Hormuz, Red Sea/Yanbu, Russia/Ukraine, possibly Libya as problems are starting there, China is buying aggressively) then higher rates may not be enough to stop inflation. This would create a situation where both borrowing is harder and inflation continues to rage. This is very bad and will lead to demand destruction (nobody’s buying anything because it’s too expensive and they can’t finance it anyway). This results in a severe recession at the minimum.
Edit: wow, I really set off a discussion with this. See replies below for clarification on mortgage rates, which is the least important part anyways. Also, I should note that a lot of the above is a worst case scenario, if energy isn’t solved soon and especially if bonds don’t respond to the hike, leading to further hikes.
Stagflation is when the economy stagnates yet inflation is higher than ideal. Inflation and economic activity are typically correlated, and the conventional wisdom back in the day was that you couldn't have unemployment going up and things costing more, because it was expected that demand going down puts a downward pressure on prices. When people aren't hiring and buying but things cost more and more, life just kind of sucks. The last time this happened was in the 1970s in the aftermath of a few oil embargoes that made oil prices go through the roof and a disastrously expensive failed war in Vietnam, there was gas rationing, it sucked.
You may notice a few key similarities now with oil embargoes, reduced hiring, an extremely expensive war, and rapidly expanding government debt as a result of that war. If you want a qualitative feeling about people's moods in the 70s, you can watch such movies as:
Taxi Driver
The Deer Hunter
The Warriors
Americathon
Network
For those of us without a degree in economics the last few years have seemed a bit unhinged from reality so I will not claim any deep insight here. However, it is hard to imagine that an increase in cost of debt will not have some impact and probably in ways not anticipated by many of those with economics degrees.
Prediction: this causes a recession in two years, right after a Democrat wins the White House, who will be blamed for it. The economy will turn around after a few years, just in time for a Republican to win and claim they fixed it.
This is how Republicans have a reputation for being economically savvy despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
A 0.25% rate hike is going to cause a recession? How, exactly, would that happen?
Honestly it seems your post is heavy on politics but I am not seeing an actual argument anywhere in there.
My canned response to people being upset at various policies or ratios, whether it is inflation, or bond yields, or market movements, is to ask them what they think the correct value should be. Stop complaining about the movement and instead ask them for their target. You think a 4% FedFunds is too high or too low? What do you think the correct value is and why? You think the stock market is too high or too low, what do you think the correct value of the index should be?
Most people, who were just moments ago vociferously complaining about a movement, when asked this question fall silent, because they have no idea what the target should be, and because they have no idea about the target, they really have no business complaining about movement. Instead, they use the movement as a springboard to air their ideological beefs. But if you are going to tie some thesis to a rate hike, you better be able to explain what you think the correct rate should be and why. I'm waiting.
Personally, I think a 4% rate is perfectly fine. 5% may even be warranted, and historically this has not been a high rate, if you assume, say, 2.5% inflation and 2% GDP growth, this is a pretty reasonable place to be.
> is to ask them what they think the correct value should be
This is Hacker News, we should understand what a PID controller is.
The economy is the "plant". The variable of interest, inflation, is the output of the plant. The government interest rate is the input. As inflation varies around the target FOMC rate, the Fed adjusts the rate. If inflation is over 2%, we should expect rate hikes, regardless of what the current rate is.
This is a fairly simple and very effective system that has worked in most Western countries and the Eurozone since the 90s.
However, note that the "recession" claim is also partly correct: the reason rate hikes work to reduce inflation is that they move the economy growth rate down, in the direction of (but not necessarily into!) recession.
I don't think numbers matter here.
Bond prices shooting up is a result of market losing trust in US, or it's ability to not default.
Dollar is famous backed by $700T military. But the world has seen how it failed to secure a strait.
The current US government has broken all kind of promises. I want to highlight two in particular - free trade and immigration.
World economy has benefited for decades on the promises of free trade. The tariffs have eroded the promise and trust.
The government is also openly supporting elements who are hostile to immigrants. Immigrants are the backbone of US economy, has been for over hundred years. Immigrating to the US requires years of preparation, long term planning, and giving up on other luxuries and opportunities. When the government starts breaking promises by changing rules and moving the goalposts overnight, it discourages participation.
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>My canned response to people being upset at various policies or ratios, whether it is inflation, or bond yields, or market movements, is to ask them what they think the correct value should be.
Maybe find a better canned response? US debt has never been higher, and because of this even rates that are below historic highs can cause economic chaos.
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I dunno about the politics, but personally I don't think there is a generic "correct" value. The rate describes the state of the world, and the "correct" value is whatever accurately describes the state of the world.
There is a separate question though - is that state of the world good or bad for people? Is it better or worse today than it was yesterday? What can we do - collectively - to push it in a direction that best serves our collective interests? These are valid questions to ask, and I think each takes us further in the direction of politics.
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At this point its probably more like 12% temporarily because the more correct way to measure it is to take the 1980s inflation measure (from before all the medelling to make it artificially lower) and raise rates by 25 bips every quarter until that number is zero, then back it off slowly
> A 0.25% rate hike is going to cause a recession? How, exactly, would that happen?
I didn’t see anyone claim a single 25 bps hike will cause a recession.
The 30 day FFR futures (/ZQ) curve is pricing in an 80% chance of two more hikes by the March 2027 meeting and a 70% chance of 3 or 4 hikes by Sept 2027’s meeting. So, 50 bps predicted in the next 6 months and 25-50 bps more within one year.
Source is the CME Fedwatch tool: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch...
I think we’ll need to go to 5%+ within the next two years if fuel costs remain elevated.
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It's interesting that this article doesn't have the rate...
(It moved from 3.5% - 3.75% to 3.75% - 4%, the US uses a range, not a fixed number.)
But this one is something that gets results almost immediately. We will see what it does in 2 or 3 months, not years.
The current official US inflation rate is 3.4%. So the real interest rate is under 1%.
What results? Overnight interbank loan rates, yes, immediately. The effect of those rates on the economy? It will take time to propagate. Heck, some important committees only meet like twice a year.
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Another possibility is recession in next two years, but its brief enough that recovery starts before 2028 election - republicans take credit and voters believe it - JD Vance gets elected president.
I recall reading something from axios or similar, talking about how a CEO said a "nice light recession right now would be perfect for us" or something to that effect.
Wouldn’t surprise me if it was a lot sooner given skyrocketing fuel costs, high bond yields, and unsustainable AI spending.
We will enter a recession in less than two years, the R timing on this one isn’t going to work out
I doubt it will take 2 years as other ingredients are already at play.
Both parties are responsible for the inflation and debt. Fiscal policy is largely driven by congress, not the president
And which party controls congress? I'll give you a hint: It's the party that spent decades advocating for irresponsible tax cuts without cutting spending[0].
[0] Yes, I know that the Republicans said that they were going to cut spending to match the tax cuts, but that never ends up happening.
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I wonder which party's presidents have started all the trillion dollar wars in the past 30 years.....
This president single-handedly raised tariffs on goods from all over the world.
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The BBB, Iran war, and tariffs, something done solely by republicans, sometimes just the president, are the source of inflation, so you can attribute this situation mostly on Trump, and fully on republicans.
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No, this will probably fall apart before Trump is out of office and a Democrat will be expected to clean up his mess again.
I think this could be the thing that finally pops the AI circular financing bubble, leading to World Depression II. I'm not sure either of the existing 2 faces of the duopoly infesting politics will survive, and there's a non-zero chance this breaks civilization as supply chains collapse, and we enter a new dark ages.
> leading to World Depression II
This is very, very unlikely. The US would probably suffer more, given how much AI related expenditure there is. The EZ mostly wouldn't notice, and China is already basically in a depression that it's desperately trying to export its way out of (which seems unlikely without them doing something about all the underwater property debt).
(deleted, political, no point)
> The important thing is really who's on the girl's soccer team
I've not heard this expression before; can someone explain it to me?
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This exact scenario has happened 4 times in my living memory already.
> Prediction: this causes a recession in two years
"this" (raising the fed rate by .25%) is not what causes a recession in 2 years, it's what led to "this" (the ill-advised, badly-planned, Iran war) + tariffs + popping AI bubble that will do that.
I would upvote this 100x if I could. There are decades of evidence of this same thing happening but people be people'ing every 2-4 years :)
One of the more baffling things in the most recent version of that cycle was Biden being solely blamed for inflation - in particular the finger pointing over checks exactly like the ones that went out under trump.
But not doing this would, in two years, cause (or at least allow) inflation that would cause harm, too. But Trump might get blamed in that case, because inflation would increase for the next two years, and so people would experience the pain during his term.
But this being supply shock induced inflation means that raising rates will likely have little effect on lowering inflation.
"Global depression imminent, here's what it means for this poor American political party"
So, you're aligned with President Trump who wants to cut rates, then?
I read the comment as: Trump’s policies are all forcing the US into stagflation so hard the fed has to do this, knowing it’ll cause a recession.
Fed actions typically take a few years to be felt, regardless of administration.
Easy fix, have the democrats lose the next election and you break the spell. It's all military industrial complex anyway.
I wish they'd lost in 2020, that's for sure.
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Exactly like “biden’s” inflation from the zero interest rate policy.
At what point into a presidential term does it become their actual mess? And is there evidence of a time delay? Because by that argument, the mess we are in would been caused by Democrats.
Usually, months to years. The economy is a very big ship and slow to steer.
This particular crisis is quite abrupt, caused by a sharp jump in the price of oil. Most presidents don't really deserve either the credit or fault that they receive on the economy, but in this case there's a very clear and direct connection.
There's not a constant cutoff. It depends a lot on what the president and the administration do. Does the president push the button and start nuclear war? They are the primary driver for the new economy. Does the president continue the same policies that were working for the last decade and continue to work for the length of their presidency? They might never be the primary driver.
All good is due to MyParty, all bad is due to OtherParty.
Arbitrarily decided by the person with political convictions blinding them.
Yes, it happens to both sides. People convince themselves their side always makes right decisions, the other side always wrong.
The truth is that the secret sauce is in the pendulum going back and forth. The excesses of one side are soon erased by the other. It is working, as it has for many years.
Depending on who you ask, the mess we are in is caused by Democrats.
> This is how Republicans have a reputation for being economically savvy despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
And it's how Democrats have a reputation for being the "wrongly victimized underdog / misunderstood savior" despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
It bugs me that the Fed has no mechanism to really deal with supply-shock driven inflation. Prices are shooting up, but not strongly correlated to money supply at the moment. They’re shooting up because there are a dozen or more entirely capricious and totally self-inflicted supply-shocks due to bizzaro tariff “policy”, disastrous military adventurism, and general erosion of the USD the prime vessel for international trade.
The Fed tightening the money supply isn’t going to materially bring prices down, because the money supply isn’t driving the price increases.
> the Fed has no mechanism to really deal with supply-shock driven inflation.
Inflation is just a change in the ratio of money to stuff. You can reduce inflation by increasing the stuff or reducing the money, and cause it by doing the opposite. There's no requirement that the solution is applied to "the same factor", either works.
Sure, if you're wanting to assign blame or worried about externalities these things start to matter. But monetary policy is a perfectly fine tool for dealing with inflation, regardless of the cause.
Note: inflation causes prices to rise, but that doesn't mean that all changes in price are caused by inflation.
You’re describing only one flavor of inflation. What the Fed is supposed to care about is price stability, and lots of things influence prices, and not all of them are money supply and/or new money supply correspondent.
We saw this during COVID, the prices of things shot through the roof because of a combination of supply-chain shocks as well as the already well capitalized seizing the opportunity to spend their war chests locking down as much of the available supply as possible, which resulted in consolidation, which resulted in less available supply.
The random trade wars directly cause goods to cost more for absolutely no good reason whatsoever, it’s just a tax masquerading as a price increase, but the Fed deals in stabilizing prices, not taxes. So, it changing the money supply parameters does nothing.
The weakening of the international trade position of the USD writ large also causes prices to go up for no good reason, and nothing about that is going to be resolved by the Fed fiddling with the money supply parameters because it has to do with the stability and reliability of the U.S. as a trustworthy geopolitical operator, which the Fed can do next to nothing about.
The inflation being experienced as price instability/increases is being induced acutely by terrible fiscal & trade policy, but the Fed is acting to try to “fix it” using monetary policy, which won’t work at all. So, what’s the point? Just to look like it’s doing something?
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I thought about this as well. Maybe you have to slow down the entire economy to compensate for the missing supply.
Isn't the goal then demand destruction?
The net effect is demand destruction. The US shouldn't be exporting diesel when it lacks sufficient refining capacity to make up for all of the capacity destroyed or unavailable from the US war of choice with Iran. And as the price of US domestic diesel goes to $6+, oil demand is going down both because there's insufficient refining capacity and there's a general slow down in the economy from the added inflation baked-in by higher oil prices and higher diesel prices.
Additionally, immense government spending is offsetting anything the Fed can do, whereas in now-ancient times they tended to cooperate better.
> It bugs me that the Fed has no mechanism to really deal with supply-shock driven inflation.
I mean, what would that actually look like? The Fed is insulated from democratic accountability, for very good reasons, but flipside of that is that their powers are intentionally limited. If they had the same immunity to public opinion but with the power to address supply shocks, that would quickly veer into tyranny.
It's a careful balancing act and there is no perfect solution. What's supposed to happen is that Congress acts on supply-shock driven inflation, but this current Congress would rather eat a bag of broken glass than actually govern, which the Fed can't really do anything about.
What it would look like, at the barest minimum, would be the Fed rightly and with receipts calling out the fact that they’re a monetary policy function, and that the current inflationary problems aren’t a monetary one, so if the U.S. would like something done about its inflation issues, then it needs to look someplace else besides the Fed to deal with it.
It doesn’t have to do anything to monetary policy when monetary policy isn’t the problem. It can do nothing.
It’s not the Fed’s job to try to fix terrible fiscal & trade policy, but that’s now what it’s basically trying to do. So, it’s become a political function by virtue of the political apparatus offloading the consequences of its idiocy onto the Fed to clean up after it with a set of tools that can’t even actually do the job.
Yeeep, inflation right now is not a monetary phenomenon. There's also general corporate greed and ever-increasing monopolization, helped out by Trump's lax regulatory hand
Interest rates rising aren't going to fix these sources of inflation.
> inflation right now is not a monetary phenomenon
It usually isn't. That doesn't change that raising rates should slow down credit creation a bit. That reduces demand in a supply-constrained economy. It also reduces risk appetites, which helps in a perilous world. (Finally, it gives rate-cutting headroom for when someone levered blows up.)
I too have very strong opinions about central bank policies.
https://en.wikipedia.org/wiki/Stagflation
I wonder if Canada (BoC) will follow this. I hope not!
Inflation in Canada is currently right at their 2% target rate so they are unlikely to raise ... this time.
They will probably wait it out to December and make a call then, but a small bump is looking more and more likely.
They are too concerned with their housing market to raise rates.
So, during the Great Depression who ended up doing well? What can be applied to today?
The consistent best thing you can do for yourself and family is sleep well and exercise to increase your aerobic efficiency.
yes, i will become the consummate amazon prime one hour delivery guy
Unfortunately, during that time is when they screwed around with the gold confiscations. So the best option would have been to illegally hoard gold until they struck the statute down?
Oof. Private gold ownership was illegal until 1975. So, you have to hide it for 40+ years? That investment strategy has some significant downsides...
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Whoever had money on hand to buy assets at bargain basement prices for people who didn't. Also - rum runners and smugglers.
Own stuff, not paper.
That's for hyperinflation. In a crash, you actually do want money (if you can find a job).
There isn't going to be a great depression.
The US is going to debase itself endlessly through spend-print-spend-print. At some point they may load up enough debt that the economy suffers a gradual heat death, in the style of Japan, wherein too much of your national capital is going to debt maintenance, sitting in a low yield blackhole sucking the dynamism out of your system (instead of going to productive use, business expansion, R&D, et al).
There's absolutely nothing particularly interesting or special about the direction the US is going. It's very, very, very easy to see what's coming and has been for ~20 years (since Bush nearly doubled the size of the Federal Government and blew up our finances with simultaneous tax cuts + massive spending expansion, we've never turned back from the bleed).
Gold has gone up ~10x since the early Bush years precisely because of the USD debasement, that's the reduction in value in the dollar being represented in the ultimate store of value. All of it has been remarkably predictable. I've been chirping about it forever here and there's nothing special about my insight either, this stuff is plain as day national econ 101.
i know what you mean. 2008 and covid taught me to stop underestimating the abilities/nerve of our financial schemers and their political representatives to kick the can down the road. but i am too anxious about it to think straight. what to do?
> since Bush nearly doubled the size of the Federal Government and blew up our finances with simultaneous tax cuts + massive spending expansion
We were 10 years from paying off the national debt when Clinton left office. 10 years!
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The turning point is approaching: Interest rates will gradually overtake all other gov't expenditures. All politics will revolve around shoring up the parasitic drain on the rest of absolutely everything.
Unanimous is a pleasant surprise
It is. But the data is talking rather loudly at the moment.
Should have been this high years ago.
The country - particularly this industry, information technology - got addicted to cheap cash. Worse, people didn't want to pay any of it back in tax, so bond yields are going to go up on the debt that was issued to cover deficit spending.
Should be interesting to see how this impacts the AI hyper-scalers. They were already burning through cash like a furnace and were running out of people to borrow from, thus the IPO hopes.
To be honest though cash hasn't been cheap for a while, not really since 2021. We have been in relatively high interest rates for the entire AI boom. Going from 350-375 to 375-400 won't be a huge shock for hyperscalers. Interest rate are still lower than when many made their initial investments in 2023-2025
Depends on your time frame for "relative to"; rates have been high compared to ZIRP-era, but still moderate to low when compared to historical norms.
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> want to pay any of it back in tax
If they dont pay it back in tax, they pay it back in debasement of their savings and entitlements
Yep, inflation is just another kind of tax, and one that's quite hard to avoid.
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"years ago" seems like the wrong criticism. Today's rate is lower than the rates from December 2022-October 2025. That seems like years ago.
Let's say pre-COVID.
>Should be interesting to see how this impacts the AI hyper-scalers. They were already burning through cash like a furnace and were running out of people to borrow from
looks very similar to 2007-2008 - high rates plus an wide economy segment with very large debt. Now, the interesting question - did anybody "too large to fail" do (or got exposed in some other ways to) leveraged CDS on the hyperscalers bonds and private debt.
Edit: Whoever the hell flagged this lol....people were complaining the parent comment wasn't helpful so I took time to write a thoughtful response with citations. You can't win around here.
---
The counterintuitive part is that a lower Fed rate doesn't necessarily mean cheaper borrowing for the government. The Fed sets an overnight rate; someone lending for ten years cares about inflation and interest rates over those ten years. Keeping short-term rates low won't necessarily reassure that lender. [1]
It also helps to distinguish the government's debt from a giant credit card. Existing fixed-rate bonds keep their agreed interest payments. Higher borrowing costs feed into the budget as old debt matures and gets refinanced, and as new debt is issued. The pain accumulates rather than arriving all at once. [2]
Nor does a larger interest bill automatically require "printing money." Treasury borrowing and Fed money creation are separate decisions. [3]
The difficult question is how to contain inflation without causing more economic damage than necessary. A large debt load makes that tradeoff more expensive; it doesn't make either option painless.
[1] https://www.federalreserve.gov/monetarypolicy/monetary-polic...
[2] https://www.treasurydirect.gov/marketable-securities/treasur...
[3] https://www.federalreserve.gov/faqs/how-does-the-federal-res...
I thought bumping up the prime rate slowed consumer spending. But the recent price hikes are because supply is hosed (oil, tariffs), not that demand has been bidding up prices. So how is this supposed to help?
It doesn't matter whether it is a supply shock or a demand shock, the correct response to inflation is to raise rates, which reduces economic activity and in this situation the reduced activity reduces demand for oil, which is what is needed in an environment in which we have less oil than normal.
Although it is the third world that is going to take the hit, the wealthy nations will bid up the price of oil to ensure they continue to get it, the poorer nations will be priced out. What is an annoyance in the west -- say needing to delay a major purchase or postpone a vacation or reduce expenses - translates to famine and deindustrialization in the global south.
Maybe it's not such a good idea to be waging war against major resource exporting nations, the US and Europe are now sanctioning about half of the global resource exporting nations, and the only benefit of this is higher prices in our domestic economies and China coming in to sign trade deals for discounted Russian and Iranian oil.
KSA also needs to lay off the Houthis and lift the embargo, it's long past time that they give up trying to control who runs Yemen.
I mean, if predicting market behaviour was that simple, I'd be very rich by now. This is another unique moment, the beginning of the end of an empire possibly. Some unusual things are going to happen and it'll be tricky to predict reliably.
Best thing we can hope for here is Trump sees an obvious way out of this: return the economy to a predicable machine, reduce spending, tax the ultra wealthy, and ditch tariffs. But I don't think much of that's likely to occur.
We're in unchartered territory in many ways. Good luck.
Get ready for a fun ride my friends :)
Fun ride =
Oil is going up, possibly for a long time, which will have a big inflationary effect on everything. And it appears the USA government has lost the conflict it started and effectively given control over key oil delivery channels to Iran. Not to mention Saudia facing real issues from rebel groups / Yemen (simplification).
Government debt is high in several key economies, and the bond market is being saturated with AI-related bonds, as well as possibly people finally tired of lending the USA/France/UK money at low rates and demanding higher ones. And with higher interest rates and bonds rolling over it means more and more money going to pay for the debt, rather than core services.
Wild cards lurking in the bushes... AI, AGI, RSI.
And yonder you have a nuclear power floundering; its only source of hard currency is being rightfully degraded, and its leadership delusional.
And the one to watch IMO... Russian wheat export ability: wheat prices are up considerably, and combined with inflation from oil, this is the kind of stuff that creates waves of political change like the Arab Spring.
This is the right move. Inflationary pressures due to high oil prices and tariffs are not going away anytime soon. All the economic numbers point to a need for a rate hike. Not doing so has a much larger effect on the financial system than a 25 bps rate hike. Stagflation is a bigger risk to the economy.
Counterintuitively the rate hike can help lower things like mortgage rates by stabilizing the bond yields.
Definitely the right move, 100% agree.
I don't think that mortgage rates are going to go down; I think they will go up. Just my opinion.
I also think oil is about to go up even more, maybe for multiple years, which is going to be inflationary on everything we do. But, could be really good for solar growth, electrification, and electric cars.
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We'll continue through the depression we've started since 2008. (GDP growth should be closer to 3.5%-5%, but we haven't really escaped sub-2% since 2008) - our GDP has been depressed by at least 1-2% growth since that crisis, and I think a large part of it has been the inflationary cycle we started and never stopped.
The wars already put us into too much debt, Obama continued it for 8 years (granted, the deficit slowly went down, but it wasn't fixed). Trump and Biden did a huge disservice to the debt (but neither really cared much about it), and now I fear the path Bush, Obama, Trump, and Biden have laid will not be easily fixed.
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Not sure tbh.
It’s a highly non-linear system, many moving parts, people and systems adapt.
It's tough to make predictions, especially about the future!
This comment isn't helpful. Please explain for those of us without a degree in economics.
Inflation is high, so interest rates need to go up to try to slow that, but the economy isn't doing amazing already, and higher interest rates won't help that.
Not to mention the US debt is _high_ as hell and bond yields mean that's more expensive.
And the country is run by a broken fool who has no interest or ability to fix any of that.
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Higher rates means financing/borrowing is more expensive. Mortgage rates will go up, possibly pushing home prices down. This is neutral for buyers because of higher rates, but bad for sellers. Loans (personal or business) will be harder to come by. Layoffs, or at least hiring freezes, are more likely. Companies will move into a defensive rather than an growth mode. Higher unemployment will lead to more desperation, and possibly consumer defaults on loans and mortgages.
Government interest payments, which are already high, will become higher after future bond sales. This will compound future budgetary problems and could eventually lead to cuts in entitlements. If so, expect crime and political instability (already a problem) to rise in the future. This will take a while, though.
Normally rates are increased to lower inflation by reducing the supply of money. Given the multiple concurrent problems with energy (Hormuz, Red Sea/Yanbu, Russia/Ukraine, possibly Libya as problems are starting there, China is buying aggressively) then higher rates may not be enough to stop inflation. This would create a situation where both borrowing is harder and inflation continues to rage. This is very bad and will lead to demand destruction (nobody’s buying anything because it’s too expensive and they can’t finance it anyway). This results in a severe recession at the minimum.
Edit: wow, I really set off a discussion with this. See replies below for clarification on mortgage rates, which is the least important part anyways. Also, I should note that a lot of the above is a worst case scenario, if energy isn’t solved soon and especially if bonds don’t respond to the hike, leading to further hikes.
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Stagflation is when the economy stagnates yet inflation is higher than ideal. Inflation and economic activity are typically correlated, and the conventional wisdom back in the day was that you couldn't have unemployment going up and things costing more, because it was expected that demand going down puts a downward pressure on prices. When people aren't hiring and buying but things cost more and more, life just kind of sucks. The last time this happened was in the 1970s in the aftermath of a few oil embargoes that made oil prices go through the roof and a disastrously expensive failed war in Vietnam, there was gas rationing, it sucked.
You may notice a few key similarities now with oil embargoes, reduced hiring, an extremely expensive war, and rapidly expanding government debt as a result of that war. If you want a qualitative feeling about people's moods in the 70s, you can watch such movies as:
Taxi Driver The Deer Hunter The Warriors Americathon Network
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For those of us without a degree in economics the last few years have seemed a bit unhinged from reality so I will not claim any deep insight here. However, it is hard to imagine that an increase in cost of debt will not have some impact and probably in ways not anticipated by many of those with economics degrees.
Last time interest rates went up, Startups and SaaS went down, which many on HN 's livelihood depends.
why are you responding to a person like it is an LLM?
The comment could be more about the politics of this not the economics, Donald Trump has made it clear he is very against this sort of rate rise
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Higher rates means USG will need to print more money to pay for $40TN debt which will increase inflation which will force higher rates.
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bwb is likely referring to the likelihood that this will send Trump into a tremendous rage.
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