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Comment by bwb

16 hours ago

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.

80 comments

bwb

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darth_avocado  16 hours ago

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.

  • ThunderSizzle  15 hours ago

    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.

    • irishcoffee  15 hours ago

      I agree with you. We are still paying for 2008, and compounded the problem with Covid stimuli. I sure wish we would just rip the band aid off at this point, but it might already be too late. The global economy is jacked, China needs everyone to be consumers, and that well is running dry, globally.

baxtr  15 hours ago

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!

leptons  16 hours ago

This comment isn't helpful. Please explain for those of us without a degree in economics.

  • kadoban  16 hours ago

    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.

    • ThunderSizzle  15 hours ago

      The country has been _run_ by fools for 26 years. Congress has had 26 years to do something about the fiscal situation, and we've had four presidents, and the fiscal responsible side of the electorate is never listened to.

      Both sides are to blame - neither will fix the problem. Obama could've made that his goal - he was competent, had a lot of political good will, and many people were frustrated at the bailout policy Bush did, but instead it was inflationary printing (quantitative easing), Obamacare and Cash 4 Clunkers (which the used car market still hasn't recovered from).

      I never voted for him - I didn't view him as honest, nor did he seem to indicate that he liked America, but was rather just a good talker - but I think he could've been a great president given a less radicalizing agenda.

      He was probably the best situated president in terms of timing to fix the debt problem, but instead it was a good time for divisive politics. By the time Obama finished, it became clear neither party actually cared about the fiscally conservative Ron Paul supporting voting block.

      9 replies →

    • almost_usual  16 hours ago

      Long term bond yields are not directly tied to the Fed funds rate.

      The problem is the debt purchased by the Fed during QE had extremely low yields (COVID era) the reserves held by banks created by the Fed during QE now cost more to service by the Fed.

    • gloryjulio  15 hours ago

      There is also insane amount of debt from ai related investment. China's free model is crushing the ai margins while these companies need to pay their debt and obligations. The debt bomb clock is ticking.

      The next few years would be fun.

  • iamnothere  16 hours ago

    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.

    • tedggh  15 hours ago

      “Higher rates means financing/borrowing is more expensive. Mortgage rates will go up,…”

      This is highly inaccurate. The 10 year US treasury is a better metric for predicting mortgage rates. We saw this during the past interest rate cuts, interest for loans and mortgages still went up, remember? I do, because I was borrowing at the time. And why was that? Because the 10-year treasury continued going up, and that matters more than short term interest rates. The 10-year treasury is about expectations about the future, so we need to look at how the market responds before screaming mortgage rates will go up, they could actually go down.

      2 replies →

    • darth_avocado  15 hours ago

      Mortgage rates are not decided by the fed rate as much as they are by the bond yields. There’s a reason why the mortgage rates were above 7% yesterday even when the fed rate has been stable for a while.

      This rate hike is aimed to stabilize the bond yields which in turn will lower the mortgage rates.

      6 replies →

    • tossandthrow  16 hours ago

      Neutral for buyers? Absolutely not.

      As a buyer you rather want to take out a loan in a high interest rate environment than a low interest rate environment, given that the monthly payment is the same.

      1000 usd extra paid towards your mortgage actually makes a difference when the rate is 15% compared to when it is 1.5%

      10 replies →

  • Edman274  16 hours ago

    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

  • dmoose  16 hours ago

    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.

  • maerF0x0  16 hours ago

    Last time interest rates went up, Startups and SaaS went down, which many on HN 's livelihood depends.

  • theginger  16 hours ago

    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

    • Supermancho  15 hours ago

      What Trump says is never clear. It's also not a reliable source for what behavior the administration (or even he) exhibits.