Econ Militia: What is the Federal Reserve discount rate?

[khanpreston1]

y would increase in discount rate,increase inflation?

[Reckless3057]

But isn't the difference that bank to bank lending is much more limited then borrowing from the Fed? if Fed rates are higher, i can see that banks would want to then take on a lower rate from another bank. but systematically there has to be less money moving. therefore higher rates all over? don't higher rates reduce the incentive to borrow and thus incourage thrift?

[EconMilitia]

Borrowing from the Fed is always more expensive than borrowing from a member bank (the fed funds rate). Usually it's 1 point higher. Since the end of 2008, the fed funds rate has been between 0 and 0.25%.

Higher rates aren't shown to encourage thrift, but rather are well known to cause slower growth. This is the opposite of what the economy needs, given unemployment, consumer confidence, and the Fed's comments about the recovery not being self-sufficient.

So why are they doing it? I dunno.

[Reckless3057]

Wait, no, the point isn't to slow down the economy hopefully the point is to curb off debt. too much personal, national, state and budget debt. Making money more difficult to get in order to encourage thriftier spending and safer investment. The point is not go right into another bubble, instead it should enourage longer term investment and growth. once rates are normalized.

[EconMilitia]

Unfortunately, the result of the Fed's move is either to create interbank loans or to increase bank interests rates because of an increased cost of capital. It neither promotes long-term investment nor encourages thrifty spending, and certainly doesn't encourage thrift on the part of the Federal government!

[WideWorldOfWisdom]

2nd, this doesn't sound at all like an Austrian argument. It doesn't even sound an intelligent argument. U have no idea why slowing inflation might be a good idea?

U have no idea why incentivizing people to SAVE instead of take on more debt to buy consumer goods is a good thing?

Rates should be HIGHER.

This is not at all like throwing a kid in a pool. It's like throwing throwing out a safety line that's too short to a man U pushed overboard..only he's already sunk under: Too little, too late

[EconMilitia]

My issue is that slowing growth with unemployment so high is not the most responsible way to operate the currency. Also, since the Fed is just increasing the discount rate, they're not pushing up the fed funds rate; rather, they're increasing the rate they charge to lend money between the Fed and the banks. That either forces banks into riskier loans than they want to make today, or increases the Fed's take on their own loans.

[WideWorldOfWisdom]

Since when does keeping rates artificially low create growth? That's what causes BUBBLES. How many of those do we have to go through before people realize bubble inflation is not the same thing as "growth?"

What is YOUR solution? (Not that I think this tiny Fed hike is the right one..it's really so small it doesn't even matter, but it's certainly better than LOWERING rates..which sounds like what you would have them do.)

[EconMilitia]

We've recorded a couple more episodes dealing specifically with the Federal Reserve, and some answers will come out of those.

I think a good start would be to stop the mass purchase of Treasuries. Another would be to reduce the size of the budget.

[WideWorldOfWisdom]

Stop the mass purchase of Treasuries by whom? I would think a proper move would be to stop ISSUING them for a while (i.e. government stop borrowing into deficits)...something which, reducing the size of the budget would certainly help.

You'll have no argument from me there.

[WideWorldOfWisdom]

...That being said...I'm incredibly confused by this video.

First of all, in the video you say that raising interest rates slows down inflation. But in the video description you say "raising the rate increases the risk of inflation." Do you really mean to say that "SLOWING down inflation INCREASES the RISK of inflation?" That makes absolutely no sense to me.

[EconMilitia]

Economic dogma is that increasing interest rates puts a curb on inflation. This is typically done in a period of extraordinary growth, to cause a slowing of growth. That makes sense to you, yes?

So what happens when interest rates increase in a period of financial contraction, or slow growth? The likely outcome is inflationary pressure on consumer goods, caused by higher access to capital costs, a problem which may well trend over to business goods.

[WideWorldOfWisdom]

No, still doesn't make sense. I don't quite see how "inflationary pressure" is created by increasing rates. Inflation is an increase in the money supply. An increase in the interest rate will take money out of the free market and, in a way, contract the money supply...which is the opposite of inflation.

From where does "inflationary pressure" come?

[EconMilitia]

Inflation is a rise in the level of prices of goods and services. This should not be confused with monetary inflation. I don't subscribe to the theory that the two are interchangeable, for reasons rather too complex to describe here.

It's also incorrect to connect this move to changing the money supply, given the ongoing quantitative easing.

[WideWorldOfWisdom]

I'm well aware of the definition fudging. I tend to agree with Mises on this one:

"Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise."

[WideWorldOfWisdom]

Always great to see updates :)

[MrBankRuns]

The Interest Rate from the FED is an illusion that fools everyone into thinking the Paper Notes have value. They must, after all they are asking for an interest payment :0

[EconMilitia]

Is your assertion that fiat currency has no value? That's a limiting argument, since the entire world operates on fiat currency. I'm not sure I understand.

[MrBankRuns]

Think about this: Why do they require an interest payment on money they create at will. I think it is make everyone work harder for the money (in one form or another). You have the illusion of value. As long as everyone accepts the currency no one is the wiser.