alt Hacker NewsThe flaw I see is centered around this paragraph.
> How can rates come down? The present uncertainty around tariffs and a potential crisis could create conditions that pressure interest rates downward before those Treasury securities mature, by influencing Federal Reserve policy.
Rising prices due to tariffs won't pressure the Fed to lower interest rates. It will increase inflation and worries of inflation, which will actually pressure the Fed to RAISE interest rates. A slowing economy won't stop inflation... We are likely entering into a period of "stagflation". The way out last time was very high interest rates and short term economic hardship.
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The logic is very reductive. It's like: "the Fed's job is to cut a snake, so if they see a snake around their head they'll just close their eyes and cut both".
Raising rates does Absolutely Nothing to undo the tariffs or bringing the price down. Fed is not a blind machine.
+1. In my relatively uninformed opinion what trump is doing is accelerating a kind of global arbitration in which the US is no longer the dominant economic power. We are going to have to share our toys. The “3rd world” is developing and it isn’t as easy to bully the globe into doing all our dirty work.
In my imagination, 50 years from now we will have a quality of life more similar to Central Europe: fine, but nothing special. Most people will live much more simply, rent smaller spaces, drive less ostentatious cars that they share. People will live with their families out of necessity and strawberries won’t be available in December.
Since people won't actually have more money to spend, you would expect it to lower the prices of other things like housing or travel. So there should be a negligible impact on inflation depending on the weighting.
The Fed may raise interest rates, that is, proposing that securities be sold at a higher discount.
A fearful market may end up bidding up these securities anyway, bring the effective rate down.
This is flat out wrong. The Fed raises and lowers interest rates to stimulate or tamp down demand. Raising interest rates because prices rise while demand drops due to a trade war would accomplish nothing.
Perhaps, we are mixing 2 things:
1) Economic/Monetary Inflation, which is an increase in the money supply in an economy driven by government or central bank ("print money").
2) Price Inflation, which is an increase in the general price level of goods and services that people typically notice at the groceries or gas and usually derives from monetary inflation, but can also be due to the new tariffs.
Is the Fed going to do the same confusion and use 2 to justify higher rates for longer?
I think they shouldn't unless they're being disingenuous and politically motivated (push just enough to make the entire Trump mandate an unending crisis until Democrats get back in power).
Prices rising due to tariffs isn't "inflation" in any traditional sense. It's not driven by consumer demand, and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply.