Asking a stupid question here, so nobody knows how little I understand macroeconomics.
Inflation is 8% or more. Interest rates are about 0.25%. How can we possibly tame inflation by (e.g.) raising them to 3% or 4%? At that level, it still makes sense to borrow all you can, buy the basket of goods or gold or anything that holds its value in dollar terms, sell it later on, and pay the loan back.
Put another way: the Taylor rule says that the optimal rate is
r = p + 0.5y + 0.5(p - 2) + 2
where p is inflation and y is the output gap. So for p = 8% we get
r = 13% + 0.5y. Unless we're profoundly convinced that the output gap is absolutely huge, then our interest rate is ridiculously too low. Why does the Taylor rule not apply?
> Unless we're profoundly convinced that the output gap is absolutely huge, then our interest rate is ridiculously too low
Markets are profoundly convinced the output gap is/was huge.
This is true in financial markets, which aren't dumping everything yielding less than 8%. It's true in the real economy, where inventories are being spun down [1]. It's true according to CBO [2] for the time period in which that eight percent registered. (Inflation was 7.9% February 2021 to '22. The CBO output gap was, in Q1 2021, roughly where it was in Q1 2003. After 9/11 and the dot-com crash.)
Side note: this is probably the smartest question on this page.
The charts you link make the argument that the output gap was huge. Notably, 2021Q4 CBO output gap is -0.44, about where it was in 2004Q4, when we were already well on to recovery. You can plug the actual value into the Taylor rule and it comes out at about 12.5%.
My takeaways are that:
a.) Interest rates are going way up from here.
b.) Even if the Fed moves to where the dot-plots are projecting - about 3% in 2024 - it is way too little to contain inflation. I think their assumption is that inflation will come down on its own as supply-chain issues abate, but I don't share that assumption with the Fed.
> You can plug the actual value into the Taylor rule and it comes out at about 12.5%.
OP's equation for the Taylor Rule is...unorthodox [1]. For those who don't want to calculate equilibrium real interest rates and take logarithms of linear trends of GDPs, the Fed has a heat map tool [2].
It says 7 to 9%, using defaults. Higher than 3%. But within the model's error bars. (All that said, I have more confidence in inflation being manageable than rates remaining below 3%. Trading on that hunch, however, would require fighting the Fed. You don't fight the Fed.)
Have you considered that we are in the midst of an unprecedented 'goods and services" supply shock and that will drive inflation 100x more than interest rates (which haven't shown any correlation to inflation since the 80's)?
> (which haven't shown any correlation to inflation since the 80's)
Side question: how do we calculate that correlation? To clarify, I understand that you can take two sets of observations and calculate rho, etc.
What I'm really curious about is how (or whether) the correlation is adjusted. Suppose there is always some kind of base inflation that doesn't correlate with interest rates; do we have a sense for what the additive effect of changing interest rates does?
Sorry to clarify - you can run any correlation on those two lines (wither lagged or not) and you'll find very little direct relationship, but the more important point is:
By saying interest rates and inflation are not correlated, I meant that both inflation and interest rates were declining to historic lows, which is in direct opposition to the theory that 'raising interest rates reduced inflation.' As you can see on this chart, interest rates aren't even that much lower than they were in the period where we were worried we'd never see inflation ever again.
My main gripe with the current narrative around inflation is 'does it really seem logical that moving from 2.5% to 1.0% 10Y yields is what caused inflation (when going from 7.5% to 2.% had no effect), given all we know about how broken our supply chains have become?'
It was not just the 10Y though. QE + traditional federal reserve cuts affected the whole curve, out to 30 and even longer-dated (non-USG) instruments. Then you had the giant stimulus on top of that. This was about as close to helicopter money as I think the US has ever done. Many other countries adopted similar measures. We are seeing the effects of inflation from each of the above. And now, the Fed is winding down QE and raising interest rates. Stimulus is fading. This all takes time. But yes, I think it is pretty reasonable to assume inflation will go down over the next 12 months.
1) 10Y by far is the most important benchmark used in the US economy. It's the foundational rate for almost all consumer lending including mortgages and widely used as the RFR in discounting cashflows.
2) My gripe with the stimulus argument is 'why is inflation accelerating 12 months after we stopped'? For example, are used cars (a major contributor to current inflation) really going up in price b/c people can afford to pay higher prices, or is it because we are making way fewer new cars? Same story for houses (given that we've chosen to abandon billions of sqft of office space and replace that with at-home offices).
Sure, loose money support isn't helping inflation, but the idea that the solution to our current inflation problem is to decrease demand seems unthoughtful, given the fact that we know we are producing well below our potential (on a global scale).
I actually don't disagree with you that inflation will go down in the next 12 months, but I think it will primarily be on the supply side. At least I hope so.
Regarding point 1. Sure the 10 year matters. A lot.
Regarding point 2, we did not stop stimulating the economy 12 months ago. We are still stimulating the economy with negative real interest rates, a relatively high level of deficit spending, and a large federal reserve balance sheet. The only stimulus we have wound down is the pandemic loans/grants, extra unemployment benefits. We are only starting to unwind the FED balance sheet. And, real interest rates are very negative. These last accommodative measures are occurring in the midst of a fairly good economy (very low unemployment, rising wages, etc). That is why we are seeing inflation accelerating.
Okay, these are all demand issues, and you point to the concomitant supply issues as well. And I agree. The supply issues certainly make it worse.
But here's where we disagree and I encourage you to answer this question:
Are cars/gas/consumer goods/food going up in price because consumers can afford to pay more for them (demand-side) or is it because we are making less of that stuff? I agree it's both, but it appears to be supply WAY more than demand (given how loose monetary policy has been for 20+ years and how unprecedented this supply shock is)
The Fed still believes inflation will come down on its own as fiscal stimulus impact fades. Pretty clear if you read between the lines of what Powell's saying.
I tend to agree for some portion of inflation, but it's hard to tell because consumers paid down a lot of debt, refinanced their houses, student loans pause. So even without new fiscal stimulus, consumer spending power will remain elevated. Labor market is also tighter than anytime in history, which would logically lead to a wage price spiral.
Credit card debt is rising quickly though.
And finally, the most consequential rates for the economy are longer term rates, which are more market driven, not the overnight rate.
But if 10y treasury rises to even 3.5-4%, all asset valuations will implode, for the most part. Fed have backed themselves into a corner by waiting far, far too long to take any policy action. Pretty gross negligence of their duties IMO, when warning signs have been blaring for close to a year
This will go down as one of the biggest policy mistakes in Fed history.
> This will go down as one of the biggest policy mistakes in Fed history.
The Fed largely caused the 2008 crisis by underestimating the effects of falling house prices on bank solvency.
What's crazy is that all I hear about in the financial press is how the Fed saved the economy after 2008. Conveniently omitted is that their miscalculations also caused the crash.
Whenever the Fed talks about finding a soft landing, I get nervous.
The Fed helped create the housing bubble to begin with. Greenspan cut rates massively after dotcom popped and took his sweet time to normalize. Bernanke certainly could have worked with fiscal policy to bring down housing in a controlled way, as it become an out of control snowball.
Of course there were many other factors too, government policy encouraging and guaranteeing subprime mortgages, clueless borrowers, faulty credit assessments, too much leverage.
IMO the government should seek not to create bubbles and also to set up a structure where it's inherently difficult for them to form. E.g. Limiting leverage for investors/important institutions is an obvious one. A system that relies on participants making smart decisions is doomed to fail in the long run.
If buy and hold residential SFH investors were only allowed to lever up to 2x to 1, you would see significantly less speculation in SFH with minimal downside outside of investment returns for those investors.
It really doesn't take a lot to set up a safe structure while still leaving it a mostly free market. Just requires foresight and a willingness to curb some of the fun/exuberance in the short run
He cut the funds rate from 6% to 1% pretty much overnight, which was excessive given there was only a mild recession at the time.
To his credit he did start ratcheting it up shortly after.
Low rate from past decade is for many reasons, high unemployment for most of the 2010s is the main one. Weak fiscal response to 2008 leading to slow recovery.
The Fed shouldn't be the tool to try to address impact of a recession, it's much healthier to address through an intelligently crafted fiscal package. But the ease of being able to unilaterally set monetary policy tends to corrupt the Fed's decision making and skew it towards short term problems.
All that being said, Greenspan did a hell of a better job than Powell overall
Are you joking? The Fed didn't invent liquidity preference and it also didn't invent low property taxes. When the government invests into a location, land value goes up over time as more people want to live there. Speculators start inserting themselves in the process and either occupy a plot that is bigger than they need (lots of homeowners) or outright own a second house/plot. The Fed can't solve that problem.
Really, when you raise the interest rate, the only difference is that some of the money is now going to the bank instead of the landlord. It doesn't make housing more or less affordable as affordability is driven by supply and demand.
100 houses and 200 people => affordability goes down, 200 houses, 100 people => affordability goes up.
By the way, I didn't say prices because affordability can be independent of prices. If you can borrow more from a bank, you still have to outcompete the next best bidder who also gets more money so borrowing more money doesn't make it easier to obtain a house in a popular location. Okay, I oversimplified it a bit, lower interest rates do make it more affordable to live in unpopular locations as some houses are going to be empty and thus very cheap regardless of the interest rate.
This whole thing about betting on higher and higher house prices is just sick. Make houses and its land lose their value over time, that's the only way out.
I expect it to hit 3% within a month or two, along with 5-6% mortgage rates.
Buying a house now has more risk than anytime since the mid 2000s. Though many would surely dispute. Don't need to get into all the stats, but the interpretation of the stats being used to drive the FOMO narrative is a result of stats crime and misunderstanding
There comes a level with long bonds where indebted companies start to fail, and it's not very high. This will cap the 10y from going too excessively high, as bond traders are pretty smart and will buy when they think we're near the cap.
Personally I think zombie companies should be allowed to fail. Kinda like forest management for the economy. It's the better alternative to carrying non viable businesses into perpetuity. The Fed has erred on the side of bailing out speculators far too heavily... creates big moral hazard
>I expect it to hit 3% within a month or two, along with 5-6% mortgage rates.
never gonna happen. I would say there are greater odds of the stock market making new lows this year than that happening
>Buying a house now has more risk than anytime since the mid 2000s. Though many would surely dispute. Don't need to get into all the stats, but the interpretation of the stats being used to drive the FOMO narrative is a result of stats crime and misunderstanding
People say this all the time yet real estate keeps doing well.
> The Fed has erred on the side of bailing out speculators far too heavily... creates big moral hazard
Still I'd rather not be fighting the fed. Stocks and real estate prices will likely go much higher.
Mortgage rates are already over 5% for many, and the avg is around 4.8%. This is today, not in the future, if you haven't been paying attention.
And the 10y is far below where it will likely settle. So 5-5.5% mortgage is pretty much a given within the next few months barring a sudden collapse in inflation
Buying a house is fighting the fed now. They are trying to quell inflation and will very likely start selling MBS into the market next month to push mortgages rates even higher.
Don't fight the fed works both ways. And don't even look at the inflation adjusted home price chart... Hint, they are far above the 2000s peak
Doesn't a tightening environment drive down prices (favoring the buyer today) and open the prospect of refinancing next time the fed chickens out (favoring the buyer tomorrow)?
"Oh, high prices, I have just the cure: debt!" is usually a sales gimmick, not something that favors the buyer. What am I missing?
Did you not pay attention to the Fed's policy moves over the past 2 years? Which were clearly far in excess of what was necessary, once the acute crisis passed.
They didn't even blink as housing rallied at the fastest pace in history as they continued to buy MBS month after month, artificially pushing mortgage rates lower.
Hard to argue they cared at all about overdoing it, or distorting unviable companies towards profitability.
This kind of policy approach steals wealth from future generations to pay the present. It's basic math. Personally, I prefer policy makers that optimize for the long run, even when it makes the present a bit more challenging
The mistake has already been made. Markets crashing due to raising rates is due to the mistake made last year, and somewhat of an inevitable outcome.
Similar to 2000s, Bernanke raised too fast, but the raising should have started years earlier to prevent the need to move so fast
Otherwise we may very well end up in the 70s part two. There is not a good way out at this point unless the fiscal drag really is sufficient enough to cool inflation on its own. Which is really looking doubtful at this point.
A creative way out would be for the Fed to partner with fiscal policy to enact a new tax scheme or similar which sucks some of the money out without requiring higher rates. But chance of that happening is pretty much 0. It looks like the aim for the BBB has barely changed, and will still be inflationary the way it's proposed.
And keep in mind, long rates are market driven. If the Fed slow walk the rate increases, the 10y will just go up faster and faster as expectations of future inflation continue to go higher. There is no way to stop the repricing of the 10y at this point, aside from inflation coming down or more aggressive fed action to prove they are serious
You're ignoring the knock-on effects on the bond market for each rate increase.
Last year, if you bought 10-year bonds, they'd be something like 2% interest rate. Today, its 2.38%. This means that all 10-year bonds bought in 2021 (aka: today a 9-year bond) is 2%, or roughly $11,800 value remaining.
But a 10-year bond in 2022 is 2.38%, or roughly $12,380.
Relative to the 2021 bonds, you just "dropped the value" of 2021 bonds by $500-per-$10k or so. Literally, in the space of a few weeks, everyone who had 10-year-bonds from 2021 just __LOST__ money on the interest rate hike.
-------
Since banks and other large investors all own substantial amounts of bonds, the short-term effects of interest-rate changes on the _VALUE_ of bonds (ie: the 2021 issues) is arguably more important than the coupon itself.
If we're looking at +1% increase this year (to a 10Y rate of 3%), then a 10-year $10k bond 10Y @ 3% will have a Yield-to-Maturity value of $13000, meaning that the 2021-issues are worth something like 12% LESS.
EDIT: That's just the federal bond market. When you consider that car-loans, credit-cards, and Mortgages and HELOCs are also going to change in reaction to this (since these are higher-risk, a +1% chance to the "risk-free" federal rate probably will be a +1.5% to the other rates), the value of mortgages, credit card debt, car loans (etc. etc.) will similarly drop by 10%+.
Also consider what it will do to home prices. +1% interest rate to any mortgage will cause the monthly payments to skyrocket by hundreds of dollars, which will force home-prices down.
I don't think bond prices really matter. They do on treasuries as these are routinely bought and sold.
But consider that most banks, card companies, etc are more like retailers. They buy money at a certain price X (their funding costs) and sell it at Y (loan/card interest rates). As long as Y-X is positive, they're broadly OK.
The ultimate owners of these bonds are pensions, insurance, endowments, and other large actors who are basically price takers. They have huge piles of money to invest ($xx/xxx billion), and limits in how much risk they can take (e.g. only investment-grade debt) but beyond that, are looking for the best price offered given how much they need to invest, and matching the term (e.g. 5 years) to their portfolio needs. These people tend to hold bonds to maturity and just reinvest the proceeds when they mature. They don't sell them on the secondary market as much.
When Grandpa Joe / Grandma Jane decides to sell some of their retirement fund to pay for their grandkid's Christmas presents later this year, you can bet that they'll be selling bonds to get those dollars!
When those bonds are suddenly worth 5% or 10% less due to rapidly rising interest rates, on top of 7% inflation, they'll be pissed. In any case, you're basically causing the retirement funds of millions-of-Americans to suddenly decline in value.
This decline in value is arguably more important than the coupon value itself. That's all I'm trying to say. If you focus 100% on the coupon rate, you're ignoring the greater effects of the market.
I am not sure why everyone is giving complicated answers. The answer is yes, borrow until you can't. The rich do this all the time.
This has been true for decades now. We are locked into a downward trend where 0% will ultimately be the norm. We will then decide what is more important, preserving sanity or going negative. The price of sanity will be pain like no one has ever experienced since the great depression.
to the extent you think there is an output gap or you are willing to let inflation run hot for a bit due to COVID catchup because you think it's temporary, you can shade that down but it only gets you a couple percent. so the march 2022 Fed dot plot with rates maxing out around 3% seems pretty optimistic.
but if they posted a dot plot in line with Taylor rule, markets would crash, politicians would go nuts. so they are not going to do that, so they will keep tightening gradually and hope for the best. it's hard to see inflation cooling sufficiently without a recession. eventually at some point of course we will end up in one. the question is how long and how high inflation has to get. the political implications of a recession right now are a bit grim.
The Taylor rule describes monetary policy in a regime where the federal funds rate is the primary monetary policy tool. It doesn't apply in a regime with enormous QE/QT going on.
It also requires instantaneous measurement of its variables. These can be estimated in normal times but it's hard when there's been a recent anomaly. Is the 5.6% T4Q real growth the new normal or just the result of measuring out of a trough?
One view of monetary policy is that its ultimate goal should be to stabilize NGDP growth -- usually to something like 5%. Looking at the trailing 8 quarters since 2019-Q4, NGDP growth has been 5.2%. Remarkably good.
But there is some cause for concern. In my view: rising petroleum prices, QT, and further supply constraints from zero-Covid policy in China (in that order).
Interest rate raises work largely as a signal of future policy. Their 'effect' is thus entirely dependent on what the market was expecting before, and how expectations change as a result. The "Taylor rule" fails to account for this, of course.
> buy the basket of goods or gold or anything that holds its value in dollar terms
Also, even trading commodities futures, at the end of the day there are physical commodity limits. Production, storage, transportation, consumption.
You can't, for example, decide to invest the Chinese trade surplus in soybeans. Size mismatch. So you (at nation-scale) have to pick the least bad of the options available to you.
It's not a stupid question. It's just that macroeconomics is not a scientific field. You can always override a historic precedent with another - and have no way of testing hypotheses in a controlled manner
> At that level, it still makes sense to borrow all you can, buy the basket of goods or gold or anything that holds its value in dollar terms, sell it later on, and pay the loan back.
I'm guessing -- also not deeply versed in macroeconomics -- that "buy the basket of goods or gold or anything that holds its value in dollar terms" isn't actually that easy. For one, if everyone does that, you'd expect current prices of said goods to rise, and then fall when you try to sell them. Thus there's some risk that you'll essentially mis-time your transactions and buy high / sell low.
Two, there may be other reasons whatever you buy fails to hold its value. Someone might discover a giant gold deposit or whatnot, rocking the gold market.
Three, there are transaction costs. For property, you're paying realtors, home inspectors, closing costs, etc...
I'm sure this is an incomplete and naive analysis.
Remember that as they raise the rates, everything else will start changing as well. In particular mortgage rates will rise and home prices will fall as a result. The number of people refinancing is already dropping. That will in turn affect peoples spending and reduce inflation some. It's a complex system so changing one parameter will lead to changes in the others.
For now - do you think 7+% CPI inflation is going to persist for 2, 3, or 5 years? What if the Fed manages to tame the beast and we go back down to our average 2% inflation we had for the prior decade?
If you're going long on persistent inflation than go buy TIPS, I know I did as a hedge while the rest of my money is going into 1-year treasury bills because things are going to get crazy volatile as the fed funds rate continues to hike.
Buying housing in a rising rate environment is playing chicken, as rates go up affordability goes down and so does the value of the home. That's the fundamentals in a normal market, at least, because ultimately mortgage payments have to come from wages somehow. I wouldn't buy something banking on the crazy appreciation train continuing at this stage.
The general consensus is still that the current 8% inflation is mostly due to temporary factors. In particular the war in Ukraine and the uptick of the economy after Corona: they have pushed the energy prices up a lot, which in turn drive other prices up etc.
So central banks don't feel the urgency to raise interest levels above 8% and consequently the market interest rate doesn't get too high either.
Interest rates are gonna remain rock bottom forever , and be raised very very slowly even as inflation and GDP rips higher. this is incredibly bullish for stocks cuz it means all fixed income is yielding negative in real terms, so the only way to not lose money to inflation is to own stocks or real estate. Crazy.
Interest rates for real estate have already doubled from 2020. In my opinion with prices still rising we either aren’t pricing this in enough yet, or else inflation is still beating the rising rates.
Fed is more likely to target the shape of the yield curve and adjust policy accordingly, so it would be a little backwards to say that based on their forecast pace of selling longer-dated paper and supply, the yield curve will do X.
really, the question is whether a soft landing can be achieved, bringing inflation down without a recession or crisis.
When CPI inflation is 8% before the Russian shock even hits those numbers, that is quite hard to achieve. in soccer, when you have to make a saving tackle in the penalty area, you've already made a mistake.
I'm confused how a still significant net issuance of new treasuries constitutes QT. I'm sure it's me missing something but I don't know what I'm missing.
> confused how a still significant net issuance of new treasuries constitutes QT
When the Fed sells a bond, it's taking cash out of the system and exchanging it for a bond. In monetary terms, it's destroying cash. That's tightening. When the Treasury issues a bond, it swaps it for cash. Same as the Fed.
Whether the Treasury or the Fed sells a bond, it has the same monetary effect. The difference is the Treasury's issuance is twinned to public spending, making the net effect neutral. (When the Treasury spends it creates cash.) In the short term, however, when spending precedes issuance (or vice versa), the gross effects can be real.
> it for a bond. In monetary terms, it's destroying cash.
Too lazy to search for the exact link but I seem to remember reading some editorial in the financial section of The Economist about 3-4 months ago where they were saying that bonds are sort of cash-like, or were sort of cash-like when that article was written and when the papers on which that article was based had been written. If that premise were to hold true (even in part, meaning bonds are sort-of-cash), maybe most of the "rules" economists have written down until now when it comes to the cash vs. bonds relationship would need to be re-written.
For the matter, I don't take much of what it's written down in The Economist at face-value anymore but their financial stuff is still pretty spot on.
Yes. But that cash has to come from somewhere. If there's less cash in the system in aggregate, those with it gain leverage. Which means they can get a higher rate. Which raises rates.
The leaky bit in this equation are banks. They can magic money out of nothing to lend against a bond. The patch to the problem is capital requirements.
so really what likely happens is that for every dollar of bond the fed sells, you're really only reducing pennies in circulation, given capital requirements for secured loans.
> significant net issuance of new treasuries constitutes QT
The Fed doesn't make decisions about treasury issuance. Congress decides to spend money and instructs the Treasury to figure out how to finance it. That determines the net level of issuance.
QT entails reducing the size of the Fed's balance sheet, which means Fed reduces net purchases of these treasuries. These treasuries must be purchased by other market participants who do so at whatever price the market clears.
The key is this observation from the article: "QT does not change the size of the Treasury market but does change the composition of ownership. By the end of QT Non-Fed investors should hold $2t more Treasuries as Fed holdings decline by $2t."
Basically QT means fewer bonds owned by the Fed and correspondingly more bonds owned by others (banks, investors, other countries).
The article also notes that private investors have no appetite for more bonds and prices will crater as a result. Could this lead to higher yields and thus higher borrowing costs for the government? Are interest payments about to make a major jump in the federal budget?
If you ask me, yes and yes. But I don't think they will get very high. I've seen claims of low demand for US bonds before and it turned out the exact opposite.
Consider this example: The Fed has issued $2 worth of treasuries in the past, which mature today. If the Fed then issues only $1 of new treasuries today, the overall amount of treasuries in circulation shrinks.
> The Fed has issued $2 worth of treasuries in the past
The Fed doesn't issue treasuries. That's the job of the US Treasury, which is responsible for making decisions about how to issue debt. When Fed purchases treasuries, it increases the quantity of bank reserves (which are less fungible) and also increases flows of capital to money markets.
The Fed purchases securities like treasuries, mortgage backed securities, and (in emergencies under 13(3)) things like commercial debt. NY Fed offers a breakdown of policies taken during covid [0].
> The big question is 'are they assets'? They bought 'assets' which literally nobody else wants
The Fed made massive profits on its crisis-era purchases. Many were held to maturity. Your "literally nobody else" is a multi-trillion dollar pool of buyers.
> They did this in 2009 and over 10 years never exited those 'assets'
The Fed has been buying, selling and dollar rolling its Agency MBS portfolio virtually every quarter between the end of the financial crisis and beginning of the pandemic [2]. "Never exited" is false, particularly if you're citing the '09 assets. Even if we amend that to consider net positions, the very article this thread is attached to posits the reduction of those levels.
>The Fed made massive profits on its crisis-era purchases. Many were held to maturity.
The graph from multiple OPs literally say otherwise.
>Your "literally nobody else" is a multi-trillion dollar pool of buyers.
Like normally there's a multi-trillion dollar pool of buyers and the market is healthy. The fed came in when they stopped buying. That's kind of tautological.
>The Fed has been buying, selling and dollar rolling its Agency MBS portfolio virtually every quarter between the end of the financial crisis and beginning of the pandemic [2]. "Never exited" is false, particularly if you're citing the '09 assets. Even if we amend that to consider net positions, the very article this thread is attached to posits the reduction of those levels.
The balance sheet is not some spot where the government makes investments for profits. Sure they had to cycle assets but they certainly didn't exit anything.
Why did the fed not do this pre-2009. why was this only during economic disasters like covid as well? This isn't some brilliant play by the government. This is them taking on the highest risk securities and eating the cost during bad time.
If they didn't take these actions the situation would have been worse. It's good they did what they did but this was certainly not some brilliant profitable play.
Not sure what this refers to. But whoever those OPs are, they're wrong. The Fed has remitted tens of billions of dollars to the Treasury every year since 2011 [1], including from realized (not mark to market) gains.
> normally there's a multi-trillion dollar pool of buyers and the market is healthy
You said the Fed "bought assets which literally nobody else wants." Present tense. Literally.
> balance sheet is not some spot where the government makes investments for profits. Sure they had to cycle assets but they certainly didn't exit anything.
They sold. You can tell because "transaction category," column C, says "sale" versus dollar rolling.
> Why did the fed not do this pre-2009
If by "this" you mean QE, 2008 was the first true American credit crisis since WWII and the first depression-level threat since the Great Depression.
> this was certainly not some brilliant profitable play
Of course not. Making money isn't the Fed's job. It will lose money trimming its balance sheet because its policy goal, higher rates, directly reduce the value of those assets. (In the same way that its 2008 policy goals, lower rates and financial stability, directly increased the value of its purchases.)
The Fed bought assets, in 2009 and '10, which people want to buy and have wanted to buy for a decade. They verifiably sold many of those assets. They're planning to sell much more in the near future. To buy these assets they had to issue liability in the form of money, which is literally their job. Every claim in the original comment [2] is materially incorrect and/or fundamentally misguided.
What you’re missing is the Fed does not issue bonds. The government issues bonds to borrow money. If the Fed sells bonds they currently hold and reduces their balance sheet, it’s QT.
> the slope of the yield curve is determined by the expectations of future fed rate policy
Entangled with is a better way to think about it. The Fed strongly influences the rate curve. But the rate curve also influences the Fed. And trading rates isn't just about predicting what the Fed will do (though that's a big piece of it).
How much does Fed actually consider the shape of the yield curve? Powell's recent comments indicated they focus on front of curve, as opposed to something like 2s10s. Aren't central banks like ECB/BoJ more attentive to overall shape?
> How much does Fed actually consider the shape of the yield curve?
Quite a bit. The February MPR cites "yields...across maturities" in the first sentence under financial conditions [1]. (One of the entire novelties of OG QE was the purchase of longer-dated securities.)
The front of the yield curve is driven much more by Fed policy than the tail end of the curve. QE was utilized to try and influence longer tenors. Ultimately the term structure is driven by supply and demand, so the composition and size of the Fed's balance sheet has a direct impact on the shape of the curve.
well, i'd say all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables. The fed can manufacture as much 'funding' of demand as it wants to as it has an unlimited buying power.
> all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables
The Fed frames its policy response in terms of the somewhat nebulous natural rate, which implies that there is some exogenous component to rate policy. Additionally, rates have consistently trended downwards for 500 years, well before the invention of central banks [0], supporting the notion that rates are driven by exogenous factors.
Until now we're been in quantitative easing (QE), which has driven up stock prices and pushed bonds down. Does transitioning into QT imply the reverse?
The opposite. Interest rates will likely rise which makes the prices of currently held bonds go down. Inflation is so high too that bonds may continue to have negative real interest rates for a long time.
Yes, thanks. That wasn't written well. Bonds today have negative real interest rates and likely will going forward even as nominal rates rise. The only way this doesn't happen is if inflation drops quickly which seems very, very unlikely.
It doesn't. Bond prices going down will help close the gap between bond rates and inflation. When the Fed floods the market with its existing treasuries via QT, new treasuries will need to be issued at higher rates to compete.
Pushed bond yields down, by pushing bond prices up.
If you believe in value investing, the same process has pushed stock yields down (where yield is measured in terms of earnings, ie the reciprocal of the P/E ratio).
A step change down in interest rates can drive a rapid price appreciation in stocks as the value of future earnings gets pulled forward, at the cost of slower long-term appreciation after that run-up.
> Until now we're been in quantitative easing (QE), which has driven up stock prices and pushed bonds down. Does transitioning into QT imply the reverse?
> QE means the fed is buying up bonds like crazy which should push bond prices up
Correct.
When bonds go up rates go down. This is mathematical fact. (If a bond at 100 pays a $1 coupon, i.e. 1%, it pays ~0.91% when that bond trades at 110.) When rates go down, asset prices go up. This isn't mathematical fact, but it's close to economic fact. (If rates are 5%, a bond yields the same as the earnings on a stock at P/E 20. That limits P/E ratios which caps stock prices.)
QE means buying bonds so rates go down. QT is the inverse. Selling bonds so rates go up.
The Fed's balance sheet is an amazing thing from an accountings standpoint -- they're the only entity which counts currency as a liability.
But the real amazing part is that when the Fed buys something (and the only thing they ever buy is bonds) they just wish the money into existence. They take your bond and write a number in your account. And when they sell something back, the bond goes to the buyer and the money disappears.
Uh, you are getting something mixed up. When you go to a bank and deposit money, that money is your asset and the bank's liability because the bank promised to return it whenever you want to withdraw it.
In layman terms you are lending money to the bank and the bank owes you a debt. The central bank does the same thing but the depositors are commercial banks in this scenario.
>But the real amazing part is that when the Fed buys something (and the only thing they ever buy is bonds) they just wish the money into existence. They take your bond and write a number in your account. And when they sell something back, the bond goes to the buyer and the money disappears.
They wish bank reserves into existence taking an asset and creating a liability in equal proportion. By the way, commercial banks do the same thing and when they lend you money, you can actually buy things with it instead of only being able to use the fed money to lend to consumers and companies! Wow, commercial banks are amazing (sarcasm), they don't create the "useless" funny money (reserves) that the Fed creates that you can't even spend on groceries!
I just realized that this rabbit hole is too long to explain over and over again. Here is a nice summary: https://youtu.be/ZFRVfXeIaek
Well, that's because the US Treasury only mints the coins - the Fed banks buy them. All US currency in circulation is ultimately issued by the US Federal Reserve, they just don't physically make all of it.
> they're the only entity which counts currency as a liability
If you expand currency to money this describes all financial institutions. Financial institution balance sheets are weird. The Fed's is almost simpler by comparison.
the market for treasuries is now dominated by the fed, right? if demand for treasuries dries up, they'll just keep buying more until they achieve the interest rate they want. I mean we're basically just 1 step away from full blown yield curve control. how can the media keep pretending that market forces have anything to do with it anymore?
During covid, the bond market inverted. To avoid collapse of the bond market the fed was the only one who could step in and print money to buy assets. It's the right thing to do. Nobody is saying they were wrong to do this. Nixon made this possible to do and was inevitable to happen. Though Nixon placed it on manufacturing in the USA. Since his time, manufacturing was shipped out of the borders.
The problem is that they had to do this during the financial crisis and they were clearly unable to exit these 'assets' literally casting shadow on them being labelled assets to begin with. You can even see in 2013-2014 they had to buy more.
They had over 10 years to exit these 'assets' and failed to do so. Even in 2019 there was a temporary dip and then rebuy right before covid.
They say they will be doing $1T/year but that isn't anywhere near where they must go. You can extrapolate where they must go by tracking the line pre-2008. At $1T a year, it will take minimum 7 years to exit.
You'll notice that this 7 years is too long. It's 100% certain that another event will occur before they are complete in which they must buy more. Even ignoring that future prediction, it's 7 years of pain.
So what's about to happen for sure? The bond market will be taking some hits bigtime. We're talking about major negative real yields. The money will come out of retirement funds. Not exactly a prediction given bonds have taken a -2% hit already.
M2 says there's 40% inflation coming. At 7.9% that's in the area of 3 years.
BUT that 40% doesn't just stay 40%. How does it increase? It actually requires the Fed to exit that ~$7trillion right this month to keep it at 40%. If they don't and they clearly are not planning to do so. We can look at M1 and see where it might go.
So there's about 400% to deliver. In their current plan of 1 trillion/year. The USA is saying they are locking in ~200% over the next 3 years. They are saying inflation is going MUCH higher.
Mid term election won't have any major impact on this. 2024 on the otherhand? The real inflation numbers will be out then. Practically handing the election to the republicans.
Meanwhile those of us who aren't in the USA. What are we about to do? We're going to look at new reserve currencies that are more stable. Hence why biden is talking about the new world order. USA will no longer be top dog.
It's the right thing to do in an acute situation where financing locks up.
I would argue it's obviously the wrong thing to do for years and years while all assets are mooning in value, and 1m jobs being added per month.
The Fed chairpeople we've had since the financial crisis have been spineless about normalizing the balance sheet because they always optimize for the short term. Pretty sad tbh.
Need somebody who actually cares about the future generations in there. Nobody wants to be the guy that makes your stocks or house go down in value, but that's exactly what's needed to give future generations opportunity, and not just a huge asset bubble that will inevitably burst some decades down the line.
Covid monetary policy will go down as an initial success that snowballed into a huge failure.
>I would argue it's obviously the wrong thing to do for years and years while all assets are mooning in value, and 1m jobs being added per month.
That's kind of what I was saying. They did this during 2009. Great, it was needed. They should have exited and brought to balance probably by around 2016 at the latest.
>The Fed chairpeople we've had since the financial crisis have been spineless about normalizing the balance sheet because they always optimize for the short term. Pretty sad tbh.
It's not necessarily 'spinelessness' they just realize what will happen when they do this. This 'balance' let them increase the bad situation in the bad and they later have to decrease it will make a great situation worse. If the situation isn't great and they make it worse. They could make something neutral into bad.
>Need somebody who actually cares about the future generations in there. Nobody wants to be the guy that makes your stocks or house go down in value, but that's exactly what's needed to give future generations opportunity, and not just a huge asset bubble that will inevitably burst some decades down the line.
That's kind of the thing right. This is about generational warfare. This is the worker shortage of 2030 starting now. This is the boomers trying to retire and move their investment to safe bonds but not enough bonds are available. So yields are well below inflation.
> To avoid collapse of the bond market the fed was the only one who could step in and print money to buy assets. It's the right thing to do. Nobody is saying they were wrong to do this.
I argue it’s not the right thing. I agree that stepping in is necessary SOMETIMES and at reasonable scale. The feds job isn’t to prop up the stock market.
Printing money greatly benefits the rich, who own all the assets. Low income individuals have their buying power destroyed as the US dollar becomes Monopoly money.
Why have we needed 13 years/5 rounds of QE? It’s enabled rampant equities/housing speculation while engorging wealth inequality.
The only explanation I can think of is our insane national debt. It’s such an easy solution to inflate all the debt away. American monetary policy has been straight irresponsible.
>I argue it’s not the right thing. I agree that stepping in is necessary SOMETIMES and at reasonable scale. The feds job isn’t to prop up the stock market.
Keynes went into depth about this. The temporary government measures are never temporary and the point of the original original post is the fed has literally declared it's not going to be temporary.
This is my point and your point. That in the end it became the wrong thing to do.
>The only explanation I can think of is our insane national debt. It’s such an easy solution to inflate all the debt away. American monetary policy has been straight irresponsible.
Exactly right and without question the intention. The problem is that when the USA does this, the USD will no longer be the reserve currency. Nixon killed the bretton woods agreement and it was only a matter of time before the USD lost its reserve currency status. Afterall, Keynes was the dude who built this design.
Unless some unusual and unexpected thing happens soon. Most countries are going to see the USD inflation and either drop the reserve currency entirely and freefloat against the forex. Or they'll basket some new currencies in. Yuan, Pound, Euro.
Done are the days of the USD as the reserve currency. This will be a disaster for everyone who currently uses the USD.
I expect the IMF to make some huge unexpected swings.
>If any, what is your advice for poor and middle class Americans?
Well first things first. Americans are mostly 'rich'. There's a political ploy about the 'disappearing' middle class but it's because americans became rich. Investment in education killed the 'middle class' by making them rich. Take this for example: https://www.pewresearch.org/fact-tank/2015/07/09/how-america...
Yes there are many americans who have poor as a mindset. 88% of americans were upper middle or high income. The amount of americans with a poor mindset is very low. As Dave Chapelle jokes, "You're not poor, poor is a mentality. The mentality that nobody recovers from. you're broke."
So getting back to the question, say you're poor or low income. These economic problems are not your concern at all. Your concern is breaking the mentality.
You need to learn abundance and confidence. Break the poor thought. The problem or why Dave chapelle says you rarely escape being poor is that the poor mentality is hostile toward this idea.
>Printing money greatly benefits the rich, who own all the assets.
I don't know why people use the phrase "printing money", when people use this word I honestly don't know what they mean. It could literally mean anything, this isn't sarcasm. The problem is that there is no such thing as "money printing" except printing of physical cash and that isn't what people are talking about. Nobody is worried that if people withdraw money or bank notes are damaged that the Fed must print physical bank notes.
This colloquial language really drives me nuts every time I see it. When you randomly choose the meaning of printing money there are surely some situations where it is obvious that it is benefiting the rich but is that really what people are talking about? I honestly don't know or can't know.
If you are really dense, you can consider lending to be money printing and lending definitively benefits the rich as the rich have most of the assets, including bonds and money in their bank account. Since interest is paid based on how much you own, paying more interest obviously benefits the rich because rich means more money which means more interest. So, if the rich save more, the bank must lower interest rates, or lend out more money to earn more interest. Once you reach 0% interest, the interest rate cannot be lowered anymore so the only option left is to lend out all money even when it is illogical and the economy doesn't need more debt. In that sense, you can argue that the government is borrowing money to keep interest rates above 0%. When you don't do that you get Germany where interest rates have become negative. Negative interest rates obviously don't benefit the rich because they are signaling that the rich have too much money and nothing to invest it on which means that money must disappear at some point. You lose more if you have more and there is a $100k exemption on most bank accounts.
By the way, there is no direct relationship between your dollars and the lent out dollars. Even when you get a certificate of deposit and your money is illiquid, the bank still doesn't move that money, your balance is the same no matter how much of it is lent out. The money that is being borrowed is always "fresh" money. The special case is when you keep that money in demand deposits, your money is metaphorically lent out yet you can also spend it at any time! So liquidity actually increases.
“Printing money” is an easy way to describe the result of the federal reserve purchasing debt. When QE occurs, the fed buys bonds and MBS. They credit the seller’s account, and the securities get added to the Feds balance sheet. They don’t maintain cash reserves for this its straight up a credit without a buyer side debit. QE literally adds money to the financial system…hence “money printing”
The covid QE response purchases securities at a rate of ~1.5 trillion per year.
>I don't know why people use the phrase "printing money", when people use this word I honestly don't know what they mean.
So this isn't just the creation of paper money but rather issuance of new money that mostly lives in imaginary numbers inside 'accounts' of various types.
> The problem is that there is no such thing as "money printing" except printing of physical cash
I think this is your confusion.
> Nobody is worried that if people withdraw money or bank notes are damaged that the Fed must print physical bank notes.
M0 is the printed money. Paper and coin. Call it about $6 trillion.
M1 is all the usual things. Bank accounts, money orders, cheques, and everything included in M1. So roughly $20 trillion in money. This is the money that could go buy something from a store.
M2 is all of M1 and M0, but also tacking on some very plausibly going to be money stuff. Roughly $1 trillion difference but it's there anyway. It's measured but not a big factor here.
The replacement of damaged notes will have no impact at all on any of these numbers. You literally can't see it there. Looking at 2009 is interesting, but lets keep to covid.
What we can see happen during covid is actual printed money increased bigtime. There's 3 trillion new $ running around. Basically 100% increase. So they absolutely did print new money in the physical sense.
We can also see from a bank account point of view. Going from $5 trillion to $21 trillion. So it's not just currency of bills. This can't be ignored. This is 'printed money' when people say they printed money. They absolutely did to an insane degree.
>This colloquial language really drives me nuts every time I see it. When you randomly choose the meaning of printing money there are surely some situations where it is obvious that it is benefiting the rich but is that really what people are talking about? I honestly don't know or can't know.
The total $ of the american people was increased over 400%. Poor people and even middle class are crying bloody murder... they sure didn't get any of the new $16 trillion. That's roughly $53,000 per person in the USA. If the poor didn't get it... who did? They got even more money?
>If you are really dense, you can consider lending to be money printing and lending definitively benefits the rich as the rich have most of the assets, including bonds and money in their bank account.
Not sure about density here but yes absolutely that's exactly right.
>Since interest is paid based on how much you own, paying more interest obviously benefits the rich because rich means more money which means more interest. So, if the rich save more, the bank must lower interest rates, or lend out more money to earn more interest.
"the rich" is not the jeff bezos. It's retirees. Retirees just gave themselves $16 trillion.
> The money that is being borrowed is always "fresh" money.
IMO after Greenspan, the Fed was basically captured by Wall Street.
I just don't know how anyone at this point can not say the Fed's job is to write puts under the equity markets when that is exactly what they have done for 13 years.
>Yup. the fed sees it coming too. in one of their speeches they even hinted that the dollar may not be the global reserve currency forever.
I'm certainly not Nostradamus. Lots of people see it coming.
It's a huge benefit to being the reserve currency and when the USD loses it or really what's likely to happen... become far less important. The American people will be hurting quite a lot.
The big question, will the Yuan become much larger? They sure won't be if they keep spreading their efforts. Crypto might be something but would be hard.
We shall see what happens.
I have considered something, what if the USA knows this is coming and they made it appear like the USA is about to collapse. To have their enemies bet against them but then flip the book and they overextended. Sure does look like Russia right now overextended by a lot.
when the US losses global reserve currency status, it won't be the end of the world. Just look at all the past empires who had that status: Great britain, the netherlands, etc. they're all still around and still have 1st world living standards. there will be a slight drop in living standards, as imports go up in prices. you won't be able to buy as many PS2 and flat screen tvs, cars, blenders, etc. but i've got way more then enough of those already.
>i am curious what you mean by looking for new reserve currencies as a function of a portfolio, does this mean simply going overweight non US stocks?
This is significantly less important to individual investors. As an individual investor you need to simply not be in inflationary assets. Stocks, even US stocks is fine.
The USD being the world reserve currency and use by countries around the world as official currency means when the US government prints money... it's not really felt against the american people. It's felt against any country that isnt. When the USD loses it's reserve status or becomes far less important. The american people will start to truly feel inflation and the debt. Right now, this is absolutely nothing.
The BRICS summit this year will have Biden sweating bullets. They'll probably line it up against the US midterms. Ukraine wont be a subject at this summit but will be the most important subject.
Largely speaking, the USD when it drops will be very painful for the american people.
It will be interesting to see how long the fed can do this without having to reverse course due to a struggling economy. Things are tricky right now, as the economy has been dependent on a loose fed for quite a while.
We're heading towards a demographic crisis as boomers retire and need more service workers. I think this is inflationary, perhaps stagflationary.
I've heard worries that the government will run into budgetary issues if bond rates climb too high. On the other hand, any profits the fed makes on lending flow back to the Treasury, so maybe that's not an issue. Does anyone know the deal with that?
> I've heard worries that the government will run into budgetary issues if bond rates climb too high.
There's no foreseeable future where the US government has issues servicing her debt. We deficit spend because our tax revenue as a percentage of GDP is anywhere between 5-15 percentage points below other advanced nations, because congress continues to be fixated on tax breaks for the wealthy and throwing money at pork barrel projects. There's plenty of room to raise revenue and reduce spending, the unfortunate problem is the timing of such moves - we had a whole decade to get things under control in a booming economy, now we may be forced to do so in a downturn if it comes to that.
> a demographic crisis as boomers retire and need more service workers
America is blessed as far as this crisis goes. Virtually everyone else will hit it first. That creates a policy testbed. It also means others must violently re-gear for the necessary automation (or reduction in lifestyle expectations for the bulging generation).
> heard worries that the government will run into budgetary issues if bond rates climb too high
To the extent the future U.S. budget is constrained, it's by inflation. (More pointedly: the politics of inflation.) If the Congress wants to spend, it can spend. Rates be damned.
> America is blessed as far as this crisis goes. Virtually everyone else will hit it first.
This doesn't pass the smell test. Human productivity hasn't been a function of food calories and muscle mass (i.e. healthy 15-35yos) for at least a century.
While America might have a marginally younger population than China or Germany, it is not even close to competitive in terms of actual productivity. Among the younger generations there is a lot of confusion and feeling lost. Anecdotally, almost everyone from my high school graduating class -- young people! -- are floating aimlessly through university, dead-end service jobs, or unemployment. They are not "productive" in any real sense of the word. Unless there is a revolution in public policy and culture within this decade, America will face a genuine economic crisis long before Germany or China. Many parts of America (Rust Belt) have been feeling it for over a decade.
Looking solely at the two-dimensional demographic chart is a fatal error in the 21st century.
Do you have data to backup those assertions about productivity? My findings suggest the US to be on par with Germany on PPP terms, ranked 6th overall. When measuring productivity on a per hour basis the US is in the top 3.
The statistics I’m reading from WB, Oced, CB, don’t seem to backup what you’re saying, at all.
New business open soared to a historical record high in 2021. Right now, it’s difficult for many, but this time of uncertainty is not any worse than crisis’ in the past.
“Confusion & feeling lost”…pretty anecdotal, don’t you think? My generation felt the same way too in the early 2000’s. My parents as well in the 70’s. How does that statement hold any weight at all? I will agree though that this generation is undergoing a mental health crisis. They are also the first generation to really be immersed by and grow up with social media.
Were have you been? Lol. The rust belt has been the ‘rust belt’ since the 1980s.
The rust belt, namely Detroit, Ohio , Pittsburg, Cleveland, have received quite a bit of development over the last decade. I honestly believe these areas will see even more investment and growth given the climate crisis, growing investment and population.
I don’t know why people paint the US as all doom and gloom. Out of my friend group, 2/5 are doing better, 2/5 are doing about the same, 1/5 is doing worse.
With all do respect, I feel like you pulled much of what you said out of thin air.
GDP(PPP) simply isn't an accurate measure of real economic productivity, of producing real things that satisfy various human needs.
Despite being the #1 GDP, America has an unbelievably huge trade deficit, unlike Germany and China which have substantial surpluses. This is because American GDP is massively inflated by unproductive/destructive sectors like FIRE and military. For example, how does "imputed rent" have anything to do with economic productivity?
So, you’re saying, you have a better and most trusted method of measuring productivity, than the CB, WTO, WB, and OCED. Would you let me know what metric you use, then?
Also, every legitimate economist states that measuring trade policy by the size of the goods deficit is probably not a passing grade in a basic economics class. Do you have any clue what you’re talking about?
“Deficit” in the term “trade deficit” is not analogous to a deficit in personal or business finance. Trade deficits are always offset by capital inflows. A trade deficit with a financial account surplus does not necessarily mean that the U.S. is over-consuming in the present and under-investing for the future. When a trade deficit’s offsetting inflow of foreign capital goes toward government debt, it increases U.S. productivity by freeing capital for private investment.
A country like the U.S. runs an annual trade deficit with a partner country when Americans buy more goods and services from the partner than they sell to it. As a result, money flows out of the U.S. to the country, which sounds bad.
But that’s not the end of the story. Those foreigners with the trade surplus – let’s say in China – now have extra saving that needs to be put to work. A lack of productive investment opportunities at home means they look to other countries – like the U.S. – to profitably use their money.
In other words, money flowing out to pay for imports flows back in to help pay for productive investment in new capital.
> Also, every legitimate economist states that measuring trade policy by the size of the goods deficit is probably not a passing grade in a basic economics class. Do you have any clue what you’re talking about?
The neoclassical/neoliberal economists deemed "legitimate" in USA over the past 50 years are worse than useless. The Summerses and Krugmans helped architect, or at least apologize for, the ongoing American Nightmare. This is the problem!
> In other words, money flowing out to pay for imports flows back in to help pay for productive investment in new capital.
What is one example of "productive investment", emphasis on productive (i.e. not just FIRE speculation/rent-seeking), that the Chinese are making in America, and at what scale?
Remember that the vast majority of US government debt is held by....the American public. The Fed was buying treasuries that normal investors would have to regulate rates, it's not like suddenly there's 0 demand domestically for US bonds. If the Fed wants to take a haircut and start offloading their balance sheet at a discount I'll happily throw a treasury ladder together in my retirement account, stock market gains are about to get incredibly volatile and I'll take a guaranteed yield over what I predict to be a major correction in the making.
According to some napkin math, the average American household would need to buy ~$20k in bonds over the QT period. This is on the order of the average amount of savings/investments per household.
Inflation is 8% or more. Interest rates are about 0.25%. How can we possibly tame inflation by (e.g.) raising them to 3% or 4%? At that level, it still makes sense to borrow all you can, buy the basket of goods or gold or anything that holds its value in dollar terms, sell it later on, and pay the loan back.
Put another way: the Taylor rule says that the optimal rate is
r = p + 0.5y + 0.5(p - 2) + 2
where p is inflation and y is the output gap. So for p = 8% we get r = 13% + 0.5y. Unless we're profoundly convinced that the output gap is absolutely huge, then our interest rate is ridiculously too low. Why does the Taylor rule not apply?