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Fed Ends Zero-Rate Era

bloomberg.com

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Re: Fed Ends Zero-Rate Era

#21

Post by pen2l »

jdubs wrote: post #14
javiayala wrote: post #12

Hi HN, can someone please explain what are the implications here for the average-Joe?

Money becomes more expensive to borrow.

Harder to buy a house, rents might go up, etc.

Also, harder to raise capital for startups. Though that's probably a good thing that the bar is raised -- will be better in the long term for everyone.

Re: Fed Ends Zero-Rate Era

#22

Post by theseatoms »

kasey_junk wrote: post #19
chollida1 wrote: post #15

Nanex, an account that follow market micro-structure, had an interesting tweet that showed how the liquidity on 10 year Treasuries just dried up prior to the announcement. https://twitter.com/nanexllc/status/677202959030083584 I'm surprised this story has gotten so many votes so fast. This rate hike was widely predicted, as intentionally as the fed could by law so that they don't impact the markets too much. Alot of…

Treasuries always dry up in front of fed announcements. It's marked on the calendar like job numbers and other macro items that can cause wild swings. Its much cheaper to just not trade during those times than it is to build out the models/risk management components for most market makers.

In other words, the price of liquidity is much higher when impacting news (for any given security) is expected during market hours. To me this seems like a desired feature of properly functioning markets.

Re: Fed Ends Zero-Rate Era

#23

Post by o_nate »

irln wrote: post #13
o_nate wrote: post #10

Earlier quoted context omitted.

In the full text of their announcement, they said they will not be selling any for the time being. They will continue to reinvest the principal as well. They will be using other mechanisms to achieve their target.

I believe it is reverse repos [1] they are referring to. "When the Desk conducts an overnight RRP, as in the current ON RRP exercise, it is selling an asset held in the System Open Market Account (SOMA) with an agreement to buy it back on the next business day. This leaves the SOMA portfolio the same size, as securities sold temporarily under repurchase agreements continue to be shown as assets held by the SOMA in ac…

Yes, they're using reverse repos to enforce the lower end of the range (0.25%) and the interest on reserves to enforce the upper end (0.5%).

More detail here: http://www.bloomberg.com/news/articles/2015-12-16/fed-remove...

Re: Fed Ends Zero-Rate Era

#24

Post by damoncali »

javiayala wrote: post #12

Hi HN, can someone please explain what are the implications here for the average-Joe?

An oversimplification: Interest rates are going up over the long run in an effort to keep inflation from getting out of hand (very generally, asset prices go down when interest rates go up). The risk is that it will worsen unemployment before we're ready for it.

Re: Fed Ends Zero-Rate Era

#28

Post by roymurdock »

Fed raising interest rates 0.25% and setting a goal of "normal" 2% by 2018 means little to nothing. Market already priced the miniscule rate hike in as the move was widely expected, and move did nothing to assure markets that the Fed is in control, or set credible, measurable goals for future hikes.

Fed can continue to push on the supply side of money at the bank/institutional level all it wants. We need the Federal government to stimulate aggregate demand at the consumer level. How? Investing tax dollars in a smarter manner. Not raising the interest paid out on short term bonds so that institutions are incentivized to keep even more money in bonds rather than putting them to work in the economy.

Monetary policy needs to work hand in hand w/ fiscal policy. I feel bad for the Fed...its decisions are largely restricted and inconsequential when gov spending is broken, yet it receives all the attention and the blame.

Re: Fed Ends Zero-Rate Era

#29

Post by afiedler »

javiayala wrote: post #12

Hi HN, can someone please explain what are the implications here for the average-Joe?

Realistically, not much for a while. The FED still doesn't think inflation will hit its target until 2018, so low rates are here for the time being.

The two things you might notice:

- Slight increase in rates on CDs, money market accounts, and other short-term savings - Slight increase on car loan rates, mortgages, and other long-term consumer borrowing

Re: Fed Ends Zero-Rate Era

#30

Post by jfoutz »

javiayala wrote: post #12

Hi HN, can someone please explain what are the implications here for the average-Joe?

The fed interest rate is the foundation for pretty much all loans, cars, mortgages, whatever.

Low interest rates are good for borrowers. I want a car, or a house, or a power plant, or a jet, or whatever. I want to spend some money that i don't actually have. This changes the economy because more money is moving around.

High interest rates are good for lenders. I've got this pile of cash that isn't doing anything. The higher the rate, the more likely i am to loan it to someone who wants to do something with it.

The higher the rate, the more sure the borrower needs to be that they can actually put that money to good use. Not only do i have to get you your money back, i have to get you all the interest as well. Lower rates mean more activity, more people borrowing and buying stuff. Higher rates slow things down, but bring more investors out.

Say the fed rate went up 5%. Yesterday i could give you a home loan for 5%, today i could give you a loan and make 10% instead. Since that rate is the foundation of everything, my risk stays the same, but it's much tougher for you, because you have to come up with a bunch more money. They made a tiny, probably imperceptible change to you and I, unless you're actively looking to take out a loan.

Anyway, that's the gist. Borowers need to be a tiny bit more sure they can pay the interest.

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