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Oculus Spirit [97836]
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Interesting. Finally found the source of the info/graph I posted
Apr 12, 2024, 9:23 AM
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a few days ago. It seems that Larry Summers (former Treasury Secretary under Obama, and a bunch of Harvard economists) looked under the hood, past the headline economic numbers we are all being fed. As most of us know, and some ignore, what we're going through now with inflation is every bit as bad as the early 1980's, and late 70's. We just changed definitions and metrics to pay attention to, which blunts the perceived impact. Overall, consumer sentiment does not match economic numbers, for a very good reason.
https://www.nber.org/system/files/working_papers/w32163/w32163.pdf
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CU Medallion [56190]
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So, consumer sentiment is low because of higher interest rates.
Apr 12, 2024, 9:46 AM
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Isn't that the entire idea? The goal of raising interest rates is to curb consumer spending. They need to hurt the economy, but not so much that it triggers a recession. Consumers think the economy is bad and we're not in a recession, so I guess that's a win for the Fed.
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All-TigerNet [11644]
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Yep.
1
Apr 12, 2024, 10:03 AM
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IMHO the fed should have acted faster with bigger rate increases. Maybe we’d be having cuts now. Instead, it looks like rates will stay the same this year with no cuts.
Higher rates have slowed everything which is the point.
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Oculus Spirit [97836]
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People are financing pickup trucks for over $1,000 a month.
Apr 12, 2024, 11:10 AM
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It's not the higher interest rate causing that price to be so high, it's the price of the truck. My dad bought a brand new Toyota 4runner (loaded) for $18K in 1987. In 1987 the fed rate was 5.8%. CPI was 3.8% yoy. The economy was considered fine back then, under very similar inflation/financing conditions. What's the difference? Today a new 4runner decked out is $50k. So today we have (officially) 1987 inflation levels, with similar interest rates, buying a product that costs 270% more, when real median income has only climbed from $60,000 a year, to $74,000 in the same time period.
I agree the fed didn't raise interest rates enough, but part of that (I think Powell knows) is the data he's given by the federal government is normalized and doesn't reflect actual inflation in anything approaching a nimble, or actionable way. You can't make nimble decisions on normalized data.
If you go back to the last time we had inflation, when they changed the way it is calculated in 1983, BEFORE that, inflation reached around 16-17%. The Fed chair at the time raised interest rates almost up to 20% in response. And the inflation was killed.
Today, inflation data is normalized. CPI topped out at just over 6%. And the fed raised rates to 5% to counter that. HOWEVER, using the same methodology from before 1983, CPI actually topped any inflation we saw in the late 70's up to 1983 when they changed the formula. We got close to 20%.
And the kicker is that the Federal reserve literally can not raise rates much higher, without bankrupting the provider of their inflation data, lol. Yeah, even at 5.25%, debt servicing is one of the government's biggest expenses. Around 8% it becomes THE LARGEST expense. 10, 12, 18% like Volcker did, and we're toast.
I wouldn't be surprised if the fed raises rates this year and/or doesn't drop them. They have a good basis point or two to work with, still. But they have not broken the back of the inflation with what they've done to date. Hundreds of billions of federal government dollars ride on the data released by the federal government. Just let that conflict sink in, and you see the big picture. I promise Jerome Powell sees it too. He isn't lowering rates for a long time.
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CU Medallion [56190]
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$18k in 1987 = $49,489.23 in 2024.
Apr 12, 2024, 1:05 PM
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Fixed this for you: So today we have (officially) 1987 inflation levels, with similar interest rates, buying a product that costs 270% more exactly the same.
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Oculus Spirit [97836]
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I said "real". Wages were adjusted for inflation.***
Apr 12, 2024, 1:17 PM
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CU Medallion [56190]
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"It's the price of the truck."***
Apr 12, 2024, 1:40 PM
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Oculus Spirit [97836]
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Consumer sentiment is low because of higher prices.
Apr 12, 2024, 10:14 AM
[ in reply to So, consumer sentiment is low because of higher interest rates. ] |
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We've had very good and high consumer sentiment in the past with 5% fed rates. Not now though. Why? It isn't the 5% fed rate. It's the price of the product or service.
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CU Medallion [56190]
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Read your own source, compadre.
Apr 12, 2024, 10:34 AM
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Admittedly, I only read the abstract because ain't nobody got time for 42 page PDFs.
"We propose that borrowing costs, which have grown at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era."
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