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Fed Ends Zero-Rate Era

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Re: Fed Ends Zero-Rate Era

#81

Post by jazzyk »

PaulWillis wrote: post #61
roymurdock wrote: post #28

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…

Isn't investing in bonds putting money to work in the economy? And how does the government really stimulate demand? Nobody demanded an IPhone before it existed. Good products stimulate demand.

If consumers don't have the money to purchase the goods/services they desire, nothing is going to happen.

Re: Fed Ends Zero-Rate Era

#82

Post by danieltillett »

czinck wrote: post #37
pen2l wrote: post #21

Earlier quoted context omitted.

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 move…

The fact that we can borrow at 3% for 30 years and we don't use this to invest in productive infrastructure assets is insane.

Re: Fed Ends Zero-Rate Era

#83

Post by roymurdock »

PaulWillis wrote: post #61
roymurdock wrote: post #28

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…

Isn't investing in bonds putting money to work in the economy? And how does the government really stimulate demand? Nobody demanded an IPhone before it existed. Good products stimulate demand.

Bonds are government debt. When you buy a bond, you are giving the government your money now in order to receive a return on that money later, with the expectation that the government will do something useful with the money in the meantime. So if the government is allocating its budget well, then yes, purchasing bonds is a good thing. If it is not, you are making a bad loan to someone who may not be able to pay you back in the future.

Government stimulates demand by investing in sectors that have huge up-front costs but large positive social externalities over time because the lifespan of a gov is much greater than that of an individual or corporation. It invests in infrastructure - the national grid, highways, roads, prisons, the post office, mortgage lending, insurance - most importantly though, wars, education, and healthcare. Many of these industries have become increasingly privatized over the past 30 years. This is not inherently bad, but it changes the profit time horizon and shifts incentives away from long-term investment towards short-term profit maximization.

iPhone would not exist without the development of the internet during the cold war on gov grants, the affordability and draw of public UC Berkley where Jobs and Wozniaki met, people alive and well-fed enough to buy it, etc. You can't point to a single innovation without looking at the entire fabric of the society that produced it. Gov spending has huge impact on social fabric. iPhone is also only one half of equation. If no one has the disposable income to buy one, it doesn't matter how good it is.

Re: Fed Ends Zero-Rate Era

#84

Post by dragonwriter »

pjungwir wrote: post #56
jfoutz wrote: post #30

Earlier quoted context omitted.

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…

Rising interest rates also mean that house prices should drop (or deaccelerate), right? If you figure a buyer has a fixed budget, the more they are paying in interest the less they can pay in principal. Not saying 0.25% will have much effect, but in principle don't they have that relationship?

> Rising interest rates also mean that house prices should drop (or deaccelerate), right?

Compared to without the policy change (not necessarily compared to before the policy change, though implications of the latter type are frequently treated as if they were of the former type) higher interest rates should mean (with the common assumptions about the dynamics of the rest of the market) both lower prices and fewer sales (buyers can afford less, but there's no reason for sellers to seek less, so the best any property can sell for will be lower and there will be fewer cases where any buyer will be able to offer what a seller would accept.)

Re: Fed Ends Zero-Rate Era

#85

Post by SilasX »

roymurdock wrote: post #28

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…

But it would seem like a 2% rate would still have pretty bad consequences. The average interest rate on federal debt is 2.4%. [2], and interest on that debt is about 7 percent of outlays. [1] (Yes, I looked up those figures for my previous HN comment, not trying to plagiarize myself.)

I couldn't find data on average maturity, but if it's slanted toward shor-term debt, then that average could go to more like ~3.5%, which would be a ~40% increase in interest spending, and (assuming no increase in revenues) a 3-4% cut from the federal budget, when pretty much anything is hard to cut.

Debt at these low interest rates makes spending very vulnerable to even small (point-wise) increases.

[1] http://www.cbpp.org/research/policy-basics-where-do-our-fede....

[2] http://www.pewresearch.org/files/2013/10/debt_interest1.png http://www.pewresearch.org/files/2013/10/debt_interest1.png

Re: Fed Ends Zero-Rate Era

#86

Post by vezzy-fnord »

toomuchtodo wrote: post #80
vezzy-fnord wrote: post #74

Earlier quoted context omitted.

increasing the minimum wage Be careful what you wish for: http://marginalrevolution.com/marginalrevolution/2015/03/how... legislation increasing entitlements such as social security Expected to run structural deficits by a certain point. Theoretically speaking, an endogenously determined fiat money system doesn't really have "government debt" what with it being the sovereign issuer of debt to begin with, but in reali…

I argue my ideas only need to hold water for another 10-30 years, depending on if technology advancement keeps up. Japan's been running structural deficits for decades, and still has a very high quality of life. > but in reality politics and the economy don't exist in frictionless vacuums and there are political costs to pork barreling, logrolling, unsound investments and so forth. As basic minimum income solves this…

I argue my ideas only need to hold water for another 10-30 years, depending on if technology advancement keeps up.

Given that the AI community's prediction making skills have been just slightly better than those of Nostradamus, that's a very tough gambit to rely on.

Japan's been running structural deficits for decades, and still has a very high quality of life.

Except for the aftermath of the whole Lost Decade thing and aging population taking tolls on aggregate productivity. I'm not qualified enough to say whether causes were monetary, fiscal, sociological or some combination thereof, but listing Japan as a positive example here doesn't strike me as wise.

As basic minimum income solves this without the messy politics surrounding it.

UBI would theoretically handle a minimum transfer of purchasing power for every individual. We're talking about public programs and initiatives unrelated to that.

Though, if you're idealistic enough to think the UBI is a prospect soon realizable, I wonder why you're advocating minimum wage increases over say, stronger collective bargaining? Denmark for instance has never had a minimum wage law.

Re: Fed Ends Zero-Rate Era

#87

Post by mychael »

jstalin wrote: post #66
PaulWillis wrote: post #61

Earlier quoted context omitted.

Isn't investing in bonds putting money to work in the economy? And how does the government really stimulate demand? Nobody demanded an IPhone before it existed. Good products stimulate demand.

Politicians spending your money for you is better than you deciding how to spend it.

Username checks out

Re: Fed Ends Zero-Rate Era

#89

Post by dragonwriter »

toomuchtodo wrote: post #51
dsr_ wrote: post #50

Earlier quoted context omitted.

If you want to stimulate aggregate demand at the consumer level, you need more people to have good jobs, so they can make money, so they can spend money. This would represent a reversal of the trend since 1970 towards greater income inequality. It is not clear to me that anyone is doing anything about that (except, of course, in the negative sense.)

Exactly correct. The Federal Reserve has the knobs and levers to create asset bubbles, but not to stoke consumer demand. Only Congress can do that with legislation increasing the minimum wage, changing corporate taxes so it behooves companies to pay employees more, or legislation increasing entitlements such as social security. Those in lower and middle classes are the ones who govern the velocity of money through th…

> changing corporate taxes so it behooves companies to pay employees more

"Corporate" is perhaps too restrictive, but shifting the relative tax burden from labor to capital, without changing the overall share of the economy represented by taxes or government spending, would probably be pretty powerful here.

There are, to say the least, political difficulties involved.

Re: Fed Ends Zero-Rate Era

#90

Post by encoderer »

nemanja wrote: post #68
roymurdock wrote: post #28

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…

> ...move did nothing to assure markets that the Fed is in control, or set credible, measurable goals for future hikes Markets respectfully disagree, see the uptick across all indices since the announcement. As you point out, there is only so much Fed can do and they are taking a measured, responsible stance, well within expectations. The fact that Fed's actions are fully aligned with expectations is kind of the poin…

A huge percentage of net market moves happen on the days around fed announcements. Your interpretation of the reaction needs to be rebased onto that history. Today only looks like a big move compared to an average day in a week without a fed announcement. You can see this here: http://slopeofhope.com/socialtrade/item/19476?__share=52402
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