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Fed Ends Zero-Rate Era

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Re: Fed Ends Zero-Rate Era

#31

Post by arbitrage »

pen2l wrote: post #21
jdubs wrote: post #14

Earlier quoted context omitted.

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.

No, likely easier. Think of it this way. Borrowing money costs you more, but makes the lender more money in interest. Lenders now have more of an incentive to loan out money, because they'll actually be earning more (eventually) on it.

Re: Fed Ends Zero-Rate Era

#33

Post by noname123 »

Curious if anyone knows what is the average VC fund return for the time-span of 2010-2015 for the past five years?

Suppose if Fed plan to gradually raise interest rates to 2.0% to 2016 year's end; and with that corporate investment bonds, municipal bonds yield also rising to match and go beyond that baseline.

Then, how attractive would VC funds be for mutual and pension funds in relation to other investment alternatives: a) bonds, b) publicly-traded companies following general market trends, c) REITs, d) commodities and precious metals?

For comparison, major Internet IPO's since inception:

GRPN (-87.97%)

TWTR (-42.23%)

FB (+176.6%)

BABA (-10.02%)

ETF Tracking since ETF inception:

SOCL (ETF for Global X Social Media) (-38.8%) vs. SPY (+62.93%) vs.TLT (+1.85%);

FDN (ETF for DJIA Internet Fund, but distorted to contain established Internet companies; GOOG) (+267%) vs. SPY(+65.62%) vs. TLT (+44.18%)

Re: Fed Ends Zero-Rate Era

#34

Post by tedsanders »

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…

(1) Liquidity always dries up prior to the announcements. If you're a market maker, you don't want to get run over by someone moving the price on new information.

(2) It's a myth that raising rates will give the Fed more ammunition. That's like saying you should exercise less now so that if you gain weight in the future you'll be able to make a bigger change in the amount you exercise. (Not the perfect analogy, but I hope you get the idea.) The fallacy comes from thinking that the change in interest rates is what stimulates the economy, not the interest itself.

A second issue with raising rates to 'increase ammunition' is that if you choose a rate path that is too high, you'll depress economic growth, pushing rates down, counteracting your goal of higher rates. Monetary economist Scott Sumner writes: "Fed funds target rate increases tend to reduce the Wicksellian equilibrium interest rate, and hence give them less ammunition for the future. The ECB in 2011 is now the classic example, but you can cite Sweden, or Japan (2000 and 2006) or the US (1937) as well."

Here's a neutral-point-of-view blog post that discusses whether it makes sense to think about rate hikes as 'adding ammunition': http://johnhcochrane.blogspot.com/2015/05/small-shoes-and-he...

And here's a blog post that argues that while rate hikes might not give you monetary ammunition, they still might give you reputational ammunition: http://www.themoneyillusion.com/?p=31361

Re: Fed Ends Zero-Rate Era

#35

Post by api »

SeoxyS wrote: post #17

This could have wide implications for the startup community. A lot of people think that the current really high late-stage startup valuations, and the money pouring into the seed stage is an effect of the low interest rates. With no way to get any decent yields with these rates; it incentivizes institutional money to chase returns in alternative investment classes.

Not sure how much it will impact startups with saner valuations, but yes I do suspect we might see a unicorn apocalypse at some point in the future.

If it happens it will unroll more slowly than a public market crash since these markets are mostly illiquid and private. What you'll see is former unicorns raising down rounds and a general regression of other valuations in proportion to how over-inflated they might be.

I wonder if it might even help the other "99% of startups" by making their saner valuations seem... well... sane.

Tangential but I've wanted to ask around here for a long time:

WHY would a founder seek such insane valuations? I feel like there must be something I don't get. I understand wanting a higher valuation to raise more money with less dilution to a point, but insane valuations strike me as very dangerous. If these valuations fall then the effect is not terribly unlike a full ratchet and multiple liquidation preference and other founder-hostile terms.

Right? Or am I clueless here?

Re: Fed Ends Zero-Rate Era

#36

Post by sharkweek »

jfoutz wrote: post #30
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…

Here's one thing I don't get, pardon my fundamental lack of understanding of macroeconomics here.

How is there so much liquidity when fed rates are zero?

Re: Fed Ends Zero-Rate Era

#37

Post by czinck »

pen2l wrote: post #21
jdubs wrote: post #14

Earlier quoted context omitted.

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.

Not really, any long term fixed rate loan had this priced in for months. In fact, the FNMA 30 year interest estimate is slightly lower now than when it opened, opened at 3.040% and is currently at 3.019% (sorry, no internet source available for that or I'd link it). The question this morning was if they were going to raise the rates today or next quarter and by how much, not if they were going to.

Edit: It's now moved up to 3.048%, but either way, my point is that whether you closed on a long term fixed rate loan yesterday or today doesn't really matter.

Re: Fed Ends Zero-Rate Era

#38

Post by AngrySkillzz »

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…

They released their implementation note here [1]. The Fed completely uncapped the ON RRP program, along with pushing IOER up to 50 basis points as expected. Fed is sending a signal that they will use RRP to keep the FF rate near their target by any means necessary.

[1] http://www.federalreserve.gov/newsevents/press/monetary/2015...

Re: Fed Ends Zero-Rate Era

#39

Post by chiph »

javiayala wrote: post #12

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

If they have a variable-rate credit card that has a balance on it, they might want to start paying it down to reduce their interest costs (a good idea in any case).

If they have an ARM for their house they might want to look at what the lifetime interest rate cap is on the loan. Add that to the margin rate to find out what the payment could potentially go to. If they're not comfortable with those numbers, they might want to refinance now into a fixed-rate loan, or see how long they plan to be in the house.

There will be hidden changes as well, as businesses will be paying more for operating loans, and this increase will be passed onto their customers. So food, entertainment, etc. costs will all go up.

In short, pretty much everything you could buy just got a little more expensive.

Re: Fed Ends Zero-Rate Era

#40

Post by fludlight »

pen2l wrote: post #21
jdubs wrote: post #14

Earlier quoted context omitted.

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.

> Harder for me to buy a house. Bummer.

Yes and no. Yes because the monthly payment on a new mortgage for a given purchase price just went up. No because that payment went up for everyone by the same amount at the same time, so purchase prices will (theoretically) adjust downward.

Keep in mind that today's news means a bak will lend you money at 4% instead of 3.75%, so the effect is minimal.

Other factors that influence the housing market such as strength of the local economy and availability & quality of financing won't be affected unless we see substantial rise in rates.

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