"What we desperately need today is higher rates, not merely as a temporary measure or to restore a sense of near term credibility, but higher for longer, in order to promote long-term economic vibrancy. In the near term, this will cause economic pain and wealth destruction."

There is an apt analogy to be made with forest fires and recessions.

You can keep forest fires from erupting for decades - and we have done that in much of the American West. But the fuels continue to build up and, eventually, a fire that cannot be managed will explode violently - and cause much more damage than the aggregate of all of the smaller fires along the way.

Business firms fail. Employees of those firms lose their jobs and suppliers are left unpaid. Nobody likes this but it is the circle of life of the economy. Keeping these firms alive with cheap and easy rollover of debt is akin to letting the fuels build up in the forest: when the day finally arrives that these zombie firms cannot finance or rollover debt we will have an explosion of defaults and bankruptcies that consumes far more than the laggards we supported along the way.

We need regular recessions the same way we need regular fires in the forest.

Per the Federal Reserve, total Household Net Worth before COVID-19 was $110 trillion. Two years later on 12/31/21, it clocked in at $150 trillion - a 36% increase - the largest increase ever over such a time period.

Isn’t it odd that during a period of economic turmoil, household wealth increased by the most on record? Indeed this strange dichotomy can be understood in large part by low rates and QE.

What would explain the increase of household wealth pre-2008, before QE was even invented? The economy was in turmoil for a few months but then everything picked up again. GDP, corporate profits surged. Unemployment fell.

Home prices and stocks surged in the 80s and 90s despite high interest rates.

The fed raised rates from 0% in early 2016 to 2.5% by late 2018 and the stock market and economy did fine.

Correlation does not mean causation, as it's said. 0% interest rates forever didn't help japan until possibly only very recently. why is it suddenly different here.

Discarding that this article is about Fed's nominal rate and instead discussing the general topic of market interest rates.

Another reason for higher market interest rates is it's a forcing function on entrepreneurs to make them think harder about what they spend social resources on.

Think of it this way with an interest rate of 0* , you merely need to trade a dollar for a dollar in order to service the debt. Many would be entrepreneurs will pursue ideas which have an EROI in the [0-1]% range just because they're expected to return _something_ . However this deploys many societal resources that marginally keeps them from better ideas, should they simply wait or innovate longer. If interest rates were, say, 5% then entrepreneurs must find ways to increase resources by 5% at a minimum just to service the capital. I think this is part of why we've seen so many shitty ideas come from startup over the years. Because a net 0 outcome has minimal repercussions . Yes obviously everyone wants to be a billionaire, but thinking of every gamble having a spectrum of outcomes, it means a gambler can continue to gamble on lower payouts if the "rake" is much lower.

* Consider all of this net of inflation and mandatory minimum returns etc. so that we can speak simply about interest rates.

I subscribe to a different take on what has happened to interest rates the last 40 years. I think market driven rates have been going lower and the fed has just responded by lowering their rates.

With interest rates so low, money is poring into the stock market driving it up. This is helping the wealthy. But I also think the interest rate problem is caused by wealth inequality, with more invested money chasing fewer productive lending opportunities, and this is because more money is in the hands of savers and less in the hands of spenders.

I personally am hoping after the inflation rate comes back down we see larger net wage inflation than price inflation, returning money to the hands of the working class. (Of course, it would be tricky to push for this too much as a policy because we certainly do not want to cause a wage-inflation spiral. I don't think that is a given though. As they say, the best cure for high prices is high prices.)

The real reason why we're going to get higher rates is that we're now seeing broader wage growth and unionization.

And that's the point where inflation will be stopped by policymakers.

The asset bubbles that have been blown up were of no real concern because that makes the rich get richer, and is indeed regressive.

Now that it looks like wage inflation for the average joe might happen (which is not regressive at all), it suddenly has to be stopped at all cost.

But ultimately this will trigger an extraordinarily painful recession/depression in order to accomplish it.

There's two ways out of this. One would be to tolerate wage inflation until it caught up with asset price inflation, with rates rising naturally as investor expectations for inflation increased, this would actually produce more stable long term higher interest rates. The other way is for the fed to jack up rates until the economy goes into a recession, throwing a massive number of people out of work and destroying retirement savings for the rest of the bulk of the population and then having asset prices readjust downwards (which must eventually happen). But that latter path won't result in high long term rates since the bond markets will price in the coming recession and that the fed will once again drop rates to zero in the depression (and ultimately we have to eventually hit the "pushing on a string" condition where fed can't even reflate asset bubbles by ZIRP).

The very fact that everyone in the managerial class is so terrified of the current inflationary environment is why everyone should be more concerned with the fed slamming on the brakes and the coming disinflationary depression.

>In other words, the Fed feels it can continue to juice financial assets and exacerbate wealth inequality so long as the average person doesn’t notice price increases...

And the Fed is not quantifying stealth consumer inflation, which people do notice in spend, namely "shrinkflation" where consumer goods manufacturers reduce the amount of corn flakes in the box and hold the price the same. This was a trend happening before the headline inflation number started to move.

I'm skeptical of this argument. It has a surface plausibility, but I find it more useful to think like a scientist. Assuming that the hypothesis is true, what would we expect to observe? The claim is that that low interest rates are causing marginal investments to be made, so we would expect to see a lot of "penny boxes", to use the author's term: low-profit activity that's just squeaking by. Business profits should be low. But that's not what we're seeing at all. Profits are high, even after taking inflation into account.

There are other arguments for higher interest rates, but the analysis in the article strikes me as too simplistic.

"The reason why I write so frequently about monetary policy is because it is so important."

It isn't important. It's been made important by financiers.

What the last 50 years have shown is that trying to manage an economy by trying to influence the amount of credit is a fool's errand.

Instead we should set that ship free - and leave it up to the private sector to determine interest rates amongst themselves. That means anchoring monetary policy at zero base rates.

Instead we should be rationing firms access to labour by pushing for higher wages with a much higher minimum wage and preferably a guaranteed job for all at the higher minimum wage.

What we need to make firms efficient is reassuringly expensive labour. That way they will use the cheap access to capital to borrow, invest in technology and drive forward productivity - solely so they can use less of the expensive labour.

It's time to get banks, lending, and finance out of the prime path. As the Chinese have.

Question-- So I'm not a finance quant or anywhere near conversant in the intricacies of finance, so I really don't understand what seems to be an important question:

Why do banks have to follow the federal rate for certain types of loans? IIRC the rate is used for interbank loans against federal reserve deposit requirements, but why would they follow the Fed rate for this rather than some other market force? I don't think it's required by statute (is it?).

What, if anything, prevents banks from ignoring federal benchmark rates all together?

I have heard the case that the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is there any truth to that?

I am by no means an expert, but this doesn't make sense to me. If the choices are runaway inflation and making higher interest payments and making the debt to GDP ratio worse, the choice seems obvious.

Can somebody explain how raising rates can do anything to what really seems like a supply side problem due to COVID and war? If demand weakening by wealth destruction is the way Fed thinks they can get away with a supply side crunch due to years of offshoring then they are basically calling for a recession.

> This isn’t populist rhetoric, it’s the Fed’s own data.

It's sad the author feels they even need this disclaimer. Its interesting how much gets lumped into a political cause (that requires inheriting all associated political causes of that party).

Higher rates are coming, that's certain. Is there any work on estimating what the optimal interest rate is to combat the high inflation that we're seeing? I'm not an economist so perhaps the question doesn't make sense.

You can't write off all lending that you don't see as "worth it" as a "penny box". We spend money on things like housing and cars because those things empower us to create and forge new paths ahead. Sometimes it's more of a liability we are putting capital in to--but we tell ourselves it's an investment. Likewise lending capital to acquire a company may have societal gains, to say nothing of the long term economic growth that this argument ignores.

If you currently work for a tech company that runs on VC cash, the time to look for an established profitable enterprise to work for is yesterday.

Raising rates will likely massacre debt dependent companies.

A major driver of inflation is Baby Boomers retiring. If we want to contain inflation, we should immediately increase the full retirement age to 70 and partial to 65.

Secondly, we can immediately ban the purchase of Crytpocurrencies, to drive down the price and hence attractiveness of mining and electricity rates.

Government action needs to be at the supply side.

Since the first sentence is factually wrong this article is useless drivel. The FED is not a government. It is a banking organization created to keep the rich, rich. Full Stop.