Join the discussion
Write your take first — we'll ask for email only when you're ready to publish.
- Hacker News
- As everyone should know by now, the US government runs a massive deficit, that is the difference between tax receipts (and other income) minus expenses. The current US public debt is hovering around $40T and the annual deficit is pushing toards $2T.
A lot of that $40T was borrowed at lower interest rates but let's assume for argument's sake that it was borrowed at 5%. That's $2T in interest alone every year. There's a huge difference between adding $2T in debt at 5%+ every year vs 1-3%.
The Fed has auctions to sell its debt. That market clears at a certain interest rate so if the market isn't buying the debt the rate the Fed pays has to go up. That's what's happening here.
What's driving this is that inflation is above the ~2% target. Well above, actually. There are generally two ways of tackling high inflation: with monetary policy (ie raising interest rates) and with fiscal policy (by raising taxes). Modern US administrations (both parties) have completely abandoned any pretense of ever raising taxes. That was the appropriate solution during the inflation shock of 2020-2022. Some European countries did this with a corporate windfall profits tax (eg Spain). The US did not.
The problem is that since housing is such a huge part of consumer spending, higher interest rates mean higher mortgage rates, which means higher housing expenditure, which means higher inflation. Now luckily most mortgages in the US are 30 year fixed so this is slow to respond and only really affects new mortgage. Other countries aren't so lucky.
But the big drivers in inflation are soaring grocery costs and energy costs. Energy costs, particularly diesel, is a massive driver of inflation. The rise in groceries since Covid has completley outpaced inflation while real wages have fallen. There's only so much more inflation the American consumer can take. Household savings rates are already very low so there's very little in the way of a buffer to absorb higher costs.
This is all being exacerbated by the disastrous war in Iran and the war in Ukraine. Russia had been a net exporter of diesel until recently as Ukraine has damaged an estimated 40% of Russian refining capcity. Refineries in the Gulf have also been taken offline. There's been a loss of over 1 million barrels per day in refining capacity. This is somewhat paradoxically why crudel oil prices are relatively low given all that's going on: because crudel oil is mostly useless unless it's refined. Destroy refineries and demand for oil goes down. But the demand for refined petroleum products goes up, way up [1].
It should be noted that China has essentially saved the world economy up to this point [2]. The closure of the Strait of Hormuz blocked the passage of ~20 million barrels per day of crude (plus 20-30% of the world's natural gas plus fertilizer plus helium). The inflation shock of 2020-2022 occurred because we lost "only" 10 million barrels. But China seemingly cut their imports by 5M. Saudi Arabia diverted 5-7 via the East-West pipeline to the Red Sea. The US has been draining the strategic reserve and so net we've only lost a few million barrels per day. That's temporary. the SPR has hit historic lows not seen in 40 years and it can't get much lower without risking a collapse of the salt caverns it's stroed in in Louisiana. Nobody knows if and when that'll happen because we've never done this before.
The backdrop for all this is that there has been a decades-long effort at this point to essentially loot government coffers in the US. More tax cuts for the top 0.01%. The Western world in general has reached a breaking point where land hoarding and wealth need to be taxed or society as we know it will actually break down. I'm not being hyperbolic. Currently, there's no concern for that from the looters because upheaval means war, which means more weapons sales. Also, free movement of capital means the wealthy believe they can just flee.
For context, a mere 10 years ago the US total public debt was ~$16T. It's 2.5x'ed in a decade and only going to get worse unless something drastically changes.
Warsh was put in to cut rates for political purposes. The best he can do is to hold rates steady because they really should go up in an environment where we aren't going to raise taxes.
As for Iran, it's been clear since at least April, that this is an unmistakable and undeniable total strategic defeat for the US and there is no way out other than to surrender. This event will be written about in history books as a turning point in the world order that was designed by the US, for the US after 1945. We are entering a new era. This is going to redefine US relationships all over the world.
[1]: https://rbnenergy.com/market-data/3-2-1-crack-spread
[2]: https://www.theatlantic.com/economy/2026/07/china-iran-usa-o...
by jmyeet - Higher interest rates mean buyers can afford less house for the money. House prices go down. Boomers get mad.
- Believe it or not...calls.
- China should increase the import pace especially after the US strategic reserve depleted. Considering that despite Chinese saving, US and EU are more interested doing another trade war.by eunos
- Adding to this, US foreign and military policy is increasingly chaotic, so other countries are quietly disengaging, and tariffs are slowly unravelling the US’ trade relationships. The American people voted for Trump twice: Trumpism is now an established thread in US politics, and the rest of the world is taking steps to insulate itself from the coming turmoil.by cjs_ac
- And somehow this situation is all Joe Biden's fault, and Trump is still going to fix it, any day now.
A very significant amount of American voters believe this. To this day. And their belief in this is still being reinforced by the vast majority of the "mainstream media" which they believe is left-biased, which hasn't been true for very many years at this point.
This is why we are fucked and there is no way out of this that doesn't involve existential threat to our current society.
- Don't overlook quantitative easing. Introducing more money into a monetary system has a significant inflationary effect on the money that was already present.
Also, housing costs don't statically climb as interest rates go up. A decrease in market price makes up for most of the difference.
by dlcarrier - The interesting thing is, US media, US social media driven by Big Tech algorithms, Google Search, nytimes, reddit, Social newsfeeds of students, teens, teachers is not exposing this at all. It feels like we are self-contained information exposure bubble too. Only a physical visit outside of US, and looking at the information from outside of US will give a picture of the mistakes being made here.by orsenthil
- American fixed 30y mortgages actually make interest rate policy much less effective, in theory.
In most countries with normal mortgages, raising rates fairly immediately transmits through to the rest of the economy, because it affects the mortgage market. This isn't true in America, because everyone quite reasonably is able to get these insane mortgage products with literally no downside risk - if rates go up, you don't pay more. If they go down, you refinance at minimal cost.
Agree to disagree on the tax issue. The way you've framed it is fairly inflammatory, but happy to have a discussion about it. The reality is that as much money as rich people have, the middle class have a whole lot more. Every country with large government spending has broad, high taxes on the entire population, not just the rich.
by Panzer04 - Speaking as a non-American, and without the lens of partisan politics, it seems incredibly obvious to me that
Kevin Warsh < Jerome Powell < Janet Yellen
... in terms of credibility as an economist, with Ben Bernanke one step to either side of Powell depending on how much you feel he was a victim of circumstances in the 2008 crisis.
That said, the current problems in the US economy are entirely out of the control of the Fed and all to do with the current administration's policies (mainly the war vs Iran driving commod vol and the on-again off-again trade tariff shuffle driving fx vol) and the long-term deficit position driving rate curve shenanigans. The AI and private credit bubbles are just adding to the anxiety. All of this ultimately feeds into domestic inflation and job market malaise.
The bond market generally doesn't take shit from anyone and it's not surprising to me that bond investors are not impressed. None of that is on Warsh.
by seanhunter - Look at outcomes, not just words. Bernanke made a correct prediction that the rate had to stay low and that it wouldn't result in high inflation.
Meanwhile, the ECB started raising the rate once the economy stopped crashing. And that promptly caused the second recession in Europe.
by cyberax - I am a U.S. citizen so I have a stake in the success or failure of our country. Old Dinosaur Janet Yellen single handedly added more to the U.S. federal debt more than any other person in modern history. The damage she did, is the kind of damage someone would historically burn at the stake for. Trillions of debt that your future kids will have to repay casually makes you want to bring up the topic of back tar and feathering. I don’t know enough about Kevin Warsh yet to comment about him but Powell (unlike Janet) was at least very at his job, even if he frequently treated lagging economic indicators like leading indicator. Through lagging heavy actions that made me wealthy enough to put a down-payment on a house, Powell turned the Fed from a fairly unknown, hidden organization into a household name. The Fed should not be as popular as a celebrity on TMZ because it brings politics and incompetent influencers into the decision outcomes.by webninja
- Not Hacker-y enough I think; dropped to third page from first. Now rank 79, +108 points, 42 comments, +3hr
Thanks for the link, hope they figure it out.
by Barbing - Reuters attributes this to be somehow a personal flaw in Walsh.
Pretty sure Jerome Powell, the previous chair, would have done exactly the same thing. In fact Jerome Powell is still in the Fed and participated in this decision.
by miohtama - Jerome Powell would’ve communicated in a mealy mouthed and confusing way that was meant to appease Trump?
I’ve had quite enough of Trump’s “meritocracy”, personally.
by jquery - Maybe I missed it, but did Walsh explicitly say it's tariffs and the war driving inflation? There's a reason Trump was fighting with Powell.
https://www.reuters.com/markets/us/powell-says-tariffs-keepi...
by matwood - I think the article makes a good case why the difference in chair matters - ending forward guidance - confusing wording around what the target is now (pce vs “other stuff”) - The fact that he was appointed specifically to not raise rates
None of the applies to Mr. Powell whom the market seems to have put a great deal of trust in
by 0x53 - The direction of the 10Y is what people should care about as this a proxy for mortgage rates.
The current direction is not going where consumers would want.
by tmaly