Can Someone Explain Why The Fed May Be Stopping The Rate Hikes?

[Yavin4]

I think that the Fed is playing a dangerous game here. They held interest rates extremely low for a long period of time, and now they have to raise the rates in order to head off inflation. We've already seen out of control asset inflation with home prices. So, raising the rates has cooled off the over-inflated housing market.

Now the Fed is talking about stopping the hikes. Is this is a good idea? Has the housing market cooled off enough for this to happen?

[bemildred]

1. Could be the election coming up in ten months.

But that is just speculation on my part, of course.

[sam sarrha]

2. real estate bubble was caused by the tax cuts, rich invested the tax money

in realest sate. The bubble they created is cooling off the market

[unblock]

6. i think the real estate bubble was caused by incredibly low interest rates

not so much the tax cuts, which put money in the hands of the rich but didn't give particular incentives to invest in real estate.

the very unusually low interest rates of the past few years allowed many people to afford homes and many people to afford to pay much more for homes. this is what drove up the prices. now that rates are more reasonable by historical standards, the market is levelling off.

[WCGreen]

10. That is exactly why the increase in the price of housing

skyrocketed, that and anemic returns on investment on a lot of other more traditional investment areas...

Just wait until those adjustable rates start climbing...

Talk about a crash....

Wait....

It's coming no matter what the fed does....

[Warpy]

22. That's part of it

The other part was pent up demand from the 80s and early 90s when interest rates were in double digits, effectively pricing most people out of the market. When interest rates dropped, people who had stayed out of the market during what should have been their prime house buying years (age 28-35) all jumped in at the same time, driving up the price of housing in areas wherever there was an inadequate supply, meaning mostly the bicoastal cities.

Greenspan is halting those rate hikes for now only because the housing market is cooling off a little too fast. Nobody wants a collapse, although a slow deflation in some markets will be essential.

[InsultComicDog]

3. A more conventional answer

...would be that the Fed had a particular target number in mind before they even started the increases, and they may have reached that number or are about to.

(But they wanted to do it very slowly so there was not a sudden jolt to the economy.)

[sendero]

4. The Fed...

... is in a no-win situation, and will be so for the foreseeable future.

They cannot continue to raise rates forever or they will send the economy into a tailspin just as it appears to finally be recovering a bit.

They can't leave rates near zero, as that is inflationary and has resulted in (underreported, statistically hidden) inflation already.

The are playing a tightrope game, where they have to walk the line judiciously. There can be some disagreement about exactly where the line is, but personally I think they are pretty close. They really cannot raise rates much more right now.

[WCGreen]

11. The wealth that is fueling the consumer sector has all

come from the appreciation in housing...

Not in wages....

That is why the rate of inflation has not gone through the roof....

[sendero]

13. I think that is correct..

.... but I also think that inflation is a much bigger problem than the official statistics reflect.

Official stats will tell you that inflation is around 3%, but that is smoke and mirrors accomplished by underweighting the sectors with high price increases, and overweighting the lower increasing sectors. Real inflation is right around 6%.

Also, despite the Fed's pumping of cash into the economy the last 4 years, there has been no real boom. If there had been, like there should have been, inflation would be a serious problem by now.

[WCGreen]

16. Yes indeed you are correct....

They should have two or three versions of inflation....

For instance, older folks or those on disablity, spend much more of their income on medical stuff.... The inflation in that sector hits them way harder say than a healthy yuppie...

[Koeln]

21. yes

The problem with the mesurement of the inflation is that these general number can never show the individual situation and it is doughtfull if it presents a "real" picture. This is simply a techniical problem that someone has to accept.


What is interesting that here in germany they started during the last year to publish the core inflation which was unknown before and i don´t see any information in that number.

In US articles i often read about that before and in the end the only goal of that number is in my view to have a argument to aoid action.

Another reason for the limited inflation in the US (although this good growth numbers) are the growing imports and the trade dficit. The us imports more and more from overseas this keeps the inflation under control but creats other problems looking at the huge numbers.

The FED is in a problematic situation. Greenspan archived with easy money good economic growth numbers and ended the small recession. The american consumer and Mr Bush did a "very good" job in using the low rates for consumption financed with loans and mortgages. But now with a negative saving rate and growing household debts the fed had to react but without creating a new recession when the american consumer decide that enough is enough.

[Yavin4]

18. The Fed Has Not Done Enough To Curb RE Speculation

If they don't continue the hikes, then inflation will run rampant. People are manipulating the RE market as a means to make a living, and they can continue to do so because interest rates are still too low.

[applegrove]

5. They've sliced and diced up the economy. Housing may be hot, stock

market too - but as long as wages for working poor go down (and people are forced to shop at Walmart to buy cheap goods to stay even) then that fights inflation.

Was a time everyone fought inflation together. The whole economy was either hot or not.

Don't know what is up their sleeve. Perhaps they see wages going down or something. Or more people buying civil goods from Asia.

Don't know.


The whole inflation thing is based on aggregate (across the whole country). If some sectors of the economy are doing deflation or the like - it balances out a hopping stock market and the like.

[Yavin4]

7. The Average Home Price In America is $250,000

This means that the average American homeowner has an asset value of at least $250,000. That's unsustainable in a globalized economy.

[applegrove]

9. Don't you think some people have three homes, and some... none?

I think that would be the problem.

[Yavin4]

14. I Think That People Are Using The RE Market

as their new profession. They are buying and selling homes as a means to make money, and they can do this because of low interest rates.

[applegrove]

15. I'll agree there. Whatever little jumps in the price or not - it does

provide opportunity to some - while others are the ones fighting inflation. Like coal miners who get paid 39,000 a year. That has not gone up in years.

I'm sorry. That makes the danger pay at about $0!

Yes. Some people fight inflation with lack of opportunity and competition downward and some benefit and flit and float around like they are in eden. A mixed market economy used to mean that there were various types of markets. Now it means various people face various markets. Depending if they are the chosen elites.

[unblock]

12. well, yes, but the average homeowner has a big mortgage, too

which means the prices themselves may not be unsustainable, though many individuals have the risk that goes along with being very leveraged.

[unblock]

8. supposedly they think risks are "balanced"

in theory, the fed exists to balance the risk of inflation against the risk of recession. too low interest rates courts inflation, too high interest rates risks recession.

ever since volker, the fed has taken the approach that the risk of inflation is the primary focus, even though they're charter calls for them to treat the goals as equally important.

in any event, the idea is they think that more hikes would cause too much damage to the economy. most likely, they see the housing market levelling off and they are hoping to have a slow leak of the housing bubble instead of a big burst, i.e., dramatic house price declines. if the fed stops the hikes, it means they're worried that too many hikes will trigger a collapse of the housing market, which will quickly have a ripple effect on the economy as homeowners rein in spending.

[ArmHayseed]

17. The economy is programmed

Do until worker drones catch on

Raise rates until condition equals “recession”

Convince drones that taxes on wealthy = recessions

Make tax cuts for wealthy permanent

Quickly lower rates: the economy will improve

Convince drones that tax cuts improved economy

Convince drones that Republican policies benefit them

Cut social programs to defray costs of tax cuts for royalty

If drones vote Republican
Loop
Else
Goto: Dems are corrupt tax and spenders

[sendero]

19. Very nice....

.. and exactly right. But there is one little problem with their algorithm - and that is that even though they've pumped cash into the economy on this cycle at probably an unprecendented rate, there hasn't really been a substantial recovery.

There are lots of reasons for this, tax policy (giving tax cuts to investors rather than consumers) being the biggest.

[Democrats_win]

20. Model must include: use war to distract from fact that 2million lost jobs

In 1982 Americans threw Reagan´s bums out of office. In 2002, partly because of Delay´s gerrymandering, the bums gained in congress.

2002´s mid-term elections were an example of fear over knowledge.

[liberal43110]

23. You've Got it Backwards

The Fed raises interest rates NOT to "head off inflation," but for the opposite reason: to encourage investment/borrowing/spending. The Fed raises interest rates to head off recession. When an economy heats up with a lot of investment/borrowing/spending, this can lead to inflation, so then the Fed may raise interest rates to tamp down inflation.