Comment by dabinat
16 hours ago
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.
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.
The dollar is not "backed" by a military. China has a huge military and no one uses the Yuan for third party trade. Why not? Because China does not run trade deficits that allow third parties to acquire the Yuan in the first place, it does not have open capital markets that allow third parties to store their surpluses in Yuan, and it does not have the investor protections that give investors confidence that they can pull their savings out whenever they want.
You know a nation that does have those things other than the US? Switzerland, which is why a lot of people use swiss Francs, even though Switzerland does not have a huge military. People need to stop reading Graber and others who have no economic training and don't understand global balance of payment accounting. Having a large military does not translate into people wanting your currency, otherwise China, North Korea, and Russia would have well used international currencies, rather than being forced to use the currency of their rivals.
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> 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.
> A 0.25% rate hike is going to cause a recession?
Firstly a rate hike is as much a reaction to circumstances as it is a cause. It follows changes to the financial environment. As much as the current US Administration wanted a rate drop, circumstances dictated the opposite.
Secondly, it might not be isolated. These rates move by small increments, but there are usually several moves in succession, up to 8 times a year. Compare two or three small hikes to two or three small drops and the difference starts to add up. "A 0.25% rate hike" is small, but it indicates a change in direction. The article notes that it is "for the first time since 2023".
>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.
Did you ever think that the reason why US debt is so high is because rates are so low and borrowing is so cheap? Higher rates are needed, and are really the only mechanism to reduce borrowing.
We are seeing asset bubbles across the board in this economy, in housing, in equities, auto loans, etc. It turns out that if you make something cheap, people buy more of it, and that includes the government.
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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.
I personally don't think there's a correct concept of money. Money describes how happy I feel, and the correct money I should have is whatever describes my current mood.
So what can we collective do with money so I feel most happy. This may be the most important question of all to ask.
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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.
I don’t understand why central banks seem to use such a blunt object like interest rates for every inflation problem. It would make sense to rise if the cause of inflation was accelerated economic activity, not price rises due to supply restrictions. How does hurting mortgage holders even more help with not starting wars? All it can do is have a double dampening effect on the economy as people pull back their discretionary spending.
Using interest rates for this kind of inflation is guaranteed to cause a recession.
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Yes, I think 5% will eventually happen, but I don't think we'll get there before the mid-terms, the Fed moves slowly.
Basically you have an inflation shock and you want the reaction function to be higher, so if inflation is 1% too high, you want a 1.5% or 2% rate hike. If inflation is 1% too low, you want a 1.5% or 2% rate cut. The reaction function has to be greater than the deviation from target, but this gives you price stability, it doesn't require a recession, although it may cause a recession.
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.
> What results?
Inflation numbers, companies firing, and the magnitude of fictional numbers on financial markets.
Lots and lots of things are slower to react, but those 3 are quite big and hard to ignore.
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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.
The high inflation since Covid and $40 trillion in debt didn’t happen under one party
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Partly it doesn't happen because you can't really get much done even if you have a majority. You really end up needing a super majority.
The one thing both parties agree on though is running up a massive deficit
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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.
High inflation and large debt preceded the tariffs. That said, the tariffs didn’t help either. That’s why I said largely
Ultimately the president is enabled or constrained by laws enacted by congress
Yes. It is a tax. He raised a tax.
You might argue it is inflationary.
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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.
Higher inflation rates started before any of those, but those things didn’t help
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).
> China is already basically in a depression You gotta expand on that, chief.
(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?
I may be wrong but I think they are referring to the Republican party's position on trans athletes in sports (literally, who is allowed on a girls sports team) being the only thing that matters to some voters.
Its a joke where all Republicans care about is winning the culture wars. Meaning there are boys on the girls sports teams who identify as girls. Its to get the base mad and get them to vote (supposedly).
I think they're referring to the obsession that some people have to trans issues.
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.
Would have thinned the herd nicely by botching COVID and saved a ton on welfare.
Hello similarly named account.
I basically agree. I don't care for DJT, but I can see how getting his "second term" underway after his first one could have been better. His four years away allowed him to stew and plan and respond.
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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.