7 ms·

The Fed’s imminent interest-rate decision – Is America ready for lift-off?

33 points by kevindeasis 11y ago

droffel 11y ago
Rate hikes have been "imminent" since QE1.
spikels 11y ago
It will be very interesting how this plays out. We are in rather unexplored territory. On one hand raising interest rates could spook the stock market which would reverberate through tech. On the other hand without room to lower rates the Fed would be without it's best tool when the inevitable next recession arrives. Seems like slowly raising rates is the best course.
- hibikir 11y ago
  What is interesting about this whole thing is precisely the second point: Are interest rates really the best tool to alter monetary policy? What's the real transmission mechanism by which anything the fed does affect the economy. The view I'd most like tested is Scott Sumner's, who thinks that there's no such thing as running out of ammunition while trying to provide monetary stimulus: If a central bank wants to create inflation, all they had to do is print money and actively spend it, buying bonds, stocks, anything. It's not what a majority of economists believe, but at the same time, his model is very predictive. Unconventional monetary policy, like what Japan has been doing, has changed indicators in Japan in ways that decades of traditional intervention failed to do. Either way, there's been so much talk about rate raising, that unless we think markets are very bad at prediction, I'd be very surprised much changed in the market if rates moved up a quarter of a point: The uptick has been priced into the stock prices already. It'd be news if it didn't happen.
  - toomuchtodo 11y ago
    I wouldn't say you'd want to throw printed money into any asset class; you're just going to create a bubble somewhere. I'd advocate for printing it and dropping it in everyone's checking account. It creates immediate economic activity by people who are going to go spend that money today.
    - shostack 11y ago
      Isn't that inevitable with any sort of plan to stimulate the economy? Seems like there will always be some sort of bubble(s), and that it is impossible to ever reach equilibrium or a smooth state.
      - AnimalMuppet 11y ago
        No. The Fed buying stocks and bonds doesn't increase the price of anything else very much. Not very many people buy cars because the stock market went up. But if you hand out money to actual people (basic income, maybe?), then some will pay down debt, and some will buy stuff, and some will do some of both. But those who buy stuff increase the demand for stuff, which means people have to make more stuff, which increases the number of jobs, which means that more people have money to spend, and hopefully the economy improves on a sustained (non-bubble) basis. (It also cuts down on the amount of bad debt, which is helpful to the economy as well.) The Fed buying stocks, on the other hand, does not increase jobs in any meaningful way. It just raises the prices of stocks. People with money then want to be in stocks, because the prices are going up. But they aren't buying stocks because the fundamentals are better; they're buying only because the price is going up. And their buying pushes the price up further, so more people see the price going up, so more people buy, and away we go. "Price going up disconnected from the fundamentals": that's a basic definition of a bubble. Add in the positive feedback loop of people wanting to buy because the price is going up, and it's definitely a bubble.
        toomuchtodo 11y ago
        I'm very interested how bad the fallout is going to be on the S&P when the Fed ticks up interest rates. If today's market activity was any indicator, hold on tight.
- Alupis 11y ago
  They keep talking about raising rates based on the notion the markets and economy have more than fully recovered, which is not entirely true (we just didn't like the old metrics so we changed how we measure things)[1]. It feels dangerous to change rates based on flawed data points (and also makes the Fed Reserve look to be playing partisan politics to help spin the narrative of "everything's fine"). [1] http://www.huffingtonpost.com/2013/07/19/unemployment-rate-wrong_n_3619152.html http://www.huffingtonpost.com/2013/07/19/unemployment-rate-w...
lkrubner 11y ago
I am feeling sad about this. The USA economy is clearly weak by any of its own measures, and there is the likelihood that weakness in Europe and China will further weaken the USA. Inflation has been subdued for years and has recently declined further, so there is absolutely no justification for a rate hike. Labor participation among prime age adults remains lower than before the recession. And yet the Fed seems absolutely determined to raise rates, even though there is no conceivable good that can come from this action. Edit: Please see: http://marginalrevolution.com/marginalrevolution/2015/12/economists-dont-know-what-they-are-talking-about.html http://marginalrevolution.com/marginalrevolution/2015/12/eco...
- Alupis 11y ago
  What more, the Fed (Yellen) keeps teasing a rate hike every few weeks or so, and has been doing so for months, only to never follow-through. Every time they tease it then don't act, the market takes a plunge.
  - jobu 11y ago
    > Every time they tease it then don't act, the market takes a plunge. Pretty sure the order of events is flipped. Last few fed meetings have been preceded by one sort of terrible economic news or another. (Last time it was the China slowdown.) They've been indicating for a while that they would raise rates sometime in the second half of 2015, but it's been pushed off because raising rates when markets are weak could instigate an economic meltdown.
    - codexon 11y ago
      Before I thought it should be obvious that the stock market would go up when rates drop, and vice versa. But I remember one day about 1-2 months ago, the market plunged after the Feds said they might hold off on raising the rates and there wasn't any new bad economic news for a week. All over the news, pundits blamed it as a sign of weakness because the Feds didn't ignore the stock market chaos. And now the stock market is dropping again because a rate increase is becoming likely again. Whether or not rates go up or down, the direction of the stock market seems to be controlled by emotion or big investors that have access to secret information. Retail investors like us seem to be powerless and doomed to just hold our stocks while waiting for a recovery that could take decades to occur.
dragonwriter 11y ago
> If the Fed has been a bullish coach, the markets have been trusting fans, continually believing that an increase is imminent, only to have their expectations dashed. At last, however, the moment seems to have arrived. On December 16th, when the Fed’s rate-setting committee meets, it seems all but certain to raise rates. That's what the media said last meeting.
- harmegido 11y ago
  For what it's worth, the Fed Funds future markets are priced at a predicting a ~70% chance of a rate hike.
hofmann 11y ago
What I haven't been able to find out is how an interest rate hike by the Feds will change consumer borrowing (mortgages, cars, etc.). If the rate is going from 0% to 0.25% for the Fed loans, does that mean consumers will not see a rate hike, a rate hike of 0.3%, or multiples of that?
- disgruntledphd2 11y ago
  As the article says, most American mortgages are on fixed rates. You may see an increase in rates for non-mortgage borrowing.
carsongross 11y ago
Reminder, someone at the Fed thought negative rates in 2015 and 2016 were appropriate: https://marketrealist.imgix.net/uploads/2015/09/Sep-dot-plot.1.jpg https://marketrealist.imgix.net/uploads/2015/09/Sep-dot-plot... I'm not saying it was Yellen... But it was Yellen. If they were looking to shock-and-awe this market, talking hike and then going negative would do it. I have no idea what is going to happen.
- zerstroyer 11y ago
  Well negative interest rates could be appropriate for negative economic growth. So if we never allow for negative interest rates we never allow for negative economic growth. But if we ever want to achieve singularity, we have to allow our economy to shrink to (zero).
pdq 11y ago
This story has been "The Boy Who Cried Wolf" for more than the past year. Every 4 weeks they threaten and no change. I'm hoping they finally move, because rates have been too low too long. Yes I realize this is likely the worst time to raise rates in the past 5 years, but that's only because they waited too long.
- ergothus 11y ago
  "too low too long" Is there something inherently wrong with being low for a lengthy period of time? "Too low" is obviously bad (if true - my understanding differs, but I'm no expert), but is there any concern over "too long" if "too low" isn't true? (honest question - is a too stable rate itself a problem?) On to the "too low" part - My understanding is that Fed targets 2% inflation, and we've just not been there. Do you have reasons other than gut instinct to dislike the low rate? (Again, honest question, my understanding could very well be wrong).
  - disgruntledphd2 11y ago
    I think that rising house prices in many parts of the world are directly connected to low rates. In general (over the last century or so) house prices have kept pace with inflation. It appears that with really low interest rates, property has become a good investment for the pools of capital sloshing around looking for a return. It would be my hope that increased rates could redirect some of this capital back into bonds and other non-property investments, which would be good for many people who are looking to buy houses. This is totally just a speculative theory though, I haven't really investigated the matter in detail.
  - rquantz 11y ago
    In fact, the problem has been that rates aren't low enough, they are united by the zero lower bound. The natural interest rate would be several points in the negative.
    - pdq 11y ago
      In what universe could interest rates ever be negative and considered "natural"? Or even a zero interest rate being considered "natural". If you believe that to be true, what rational entity would take the risk of loaning out money to either lose money or get back solely their principal at some future time? And considering prices are inflating, this makes zero and negative interest rates even worse. Market interest rates reward the savers by risking their capital and loaning it to borrowers who can put that capital to work and pay back the lender both principal and interest.
rquantz 11y ago
The Fed is in a jam, though, because it faces asymmetric risks. If it raises rates too soon, its scope to cut them, should the economy then sour, is limited by the fact rates cannot fall far below zero. If it waits until inflation is stronger, it has unlimited capacity to raise rates to tame it. This to me is the key paragraph. Why not wait until we reach or exceed target inflation, when they risk tanking our still very fragile economy, and then being unable to do anything about it since rates would still be close to zero?
- seansmccullough 11y ago
  Because we will have a recession sometime in the next couple years, and if the Fed keeps interest rates at 0, it will have no ammunition when the time comes.
  - TheCowboy 11y ago
    Raising the rates prematurely, you risk accidentally triggering a recession or weakening the economy, then you're forced to raise rates to prevent a recession caused from prematurely raising rates. Interest rates aren't something you can slowly raise without effect.
    - seansmccullough 11y ago
      The economy is the strongest it's been in 5 years, and you can't keep rates low forever.
seansmccullough 11y ago
Raising rates it a good thing: 1. It allows the Fed room to maneuver during the next recession (https://en.wikipedia.org/wiki/Zero_lower_bound https://en.wikipedia.org/wiki/Zero_lower_bound) 2. It will all investors to normalize their portfolios (http://blogs.wsj.com/moneybeat/2015/09/11/what-to-ask-before-you-reach-for-yield/ http://blogs.wsj.com/moneybeat/2015/09/11/what-to-ask-before...) 3. Savings accounts and fixed income will actually yield interest. The US economy is actually in pretty good shape: - Job creation has been solid (http://www.bls.gov/news.release/pdf/empsit.pdf http://www.bls.gov/news.release/pdf/empsit.pdf) - Unemployment has been declining for 5 years (https://research.stlouisfed.org/fred2/series/U6RATE https://research.stlouisfed.org/fred2/series/U6RATE <- U6 rate, includes under-employed and those who quit looking for work) - GDP is 20% higher than before the recession (https://research.stlouisfed.org/fred2/series/GDP https://research.stlouisfed.org/fred2/series/GDP https://research.stlouisfed.org/fred2/series/A191RL1Q225SBEA https://research.stlouisfed.org/fred2/series/A191RL1Q225SBEA) - Average pay is increasing (https://research.stlouisfed.org/fred2/series/CES0500000003 https://research.stlouisfed.org/fred2/series/CES0500000003 all workers, https://research.stlouisfed.org/fred2/series/AHETPI https://research.stlouisfed.org/fred2/series/AHETPI not including supervisors)

33 points by kevindeasis 11y ago

Rate hikes have been "imminent" since QE1.

It will be very interesting how this plays out. We are in rather unexplored territory. On one hand raising interest rates could spook the stock market which would reverberate through tech. On the other hand without room to lower rates the Fed would be without it's best tool when the inevitable next recession arrives. Seems like slowly raising rates is the best course.

hibikir 11y ago
What is interesting about this whole thing is precisely the second point: Are interest rates really the best tool to alter monetary policy? What's the real transmission mechanism by which anything the fed does affect the economy. The view I'd most like tested is Scott Sumner's, who thinks that there's no such thing as running out of ammunition while trying to provide monetary stimulus: If a central bank wants to create inflation, all they had to do is print money and actively spend it, buying bonds, stocks, anything. It's not what a majority of economists believe, but at the same time, his model is very predictive. Unconventional monetary policy, like what Japan has been doing, has changed indicators in Japan in ways that decades of traditional intervention failed to do. Either way, there's been so much talk about rate raising, that unless we think markets are very bad at prediction, I'd be very surprised much changed in the market if rates moved up a quarter of a point: The uptick has been priced into the stock prices already. It'd be news if it didn't happen.
- toomuchtodo 11y ago
  I wouldn't say you'd want to throw printed money into any asset class; you're just going to create a bubble somewhere. I'd advocate for printing it and dropping it in everyone's checking account. It creates immediate economic activity by people who are going to go spend that money today.
  - shostack 11y ago
    Isn't that inevitable with any sort of plan to stimulate the economy? Seems like there will always be some sort of bubble(s), and that it is impossible to ever reach equilibrium or a smooth state.
    - AnimalMuppet 11y ago
      No. The Fed buying stocks and bonds doesn't increase the price of anything else very much. Not very many people buy cars because the stock market went up. But if you hand out money to actual people (basic income, maybe?), then some will pay down debt, and some will buy stuff, and some will do some of both. But those who buy stuff increase the demand for stuff, which means people have to make more stuff, which increases the number of jobs, which means that more people have money to spend, and hopefully the economy improves on a sustained (non-bubble) basis. (It also cuts down on the amount of bad debt, which is helpful to the economy as well.) The Fed buying stocks, on the other hand, does not increase jobs in any meaningful way. It just raises the prices of stocks. People with money then want to be in stocks, because the prices are going up. But they aren't buying stocks because the fundamentals are better; they're buying only because the price is going up. And their buying pushes the price up further, so more people see the price going up, so more people buy, and away we go. "Price going up disconnected from the fundamentals": that's a basic definition of a bubble. Add in the positive feedback loop of people wanting to buy because the price is going up, and it's definitely a bubble.
      - toomuchtodo 11y ago
        I'm very interested how bad the fallout is going to be on the S&P when the Fed ticks up interest rates. If today's market activity was any indicator, hold on tight.
Alupis 11y ago
They keep talking about raising rates based on the notion the markets and economy have more than fully recovered, which is not entirely true (we just didn't like the old metrics so we changed how we measure things)[1]. It feels dangerous to change rates based on flawed data points (and also makes the Fed Reserve look to be playing partisan politics to help spin the narrative of "everything's fine"). [1] http://www.huffingtonpost.com/2013/07/19/unemployment-rate-wrong_n_3619152.html http://www.huffingtonpost.com/2013/07/19/unemployment-rate-w...

lkrubner 11y ago

I am feeling sad about this. The USA economy is clearly weak by any of its own measures, and there is the likelihood that weakness in Europe and China will further weaken the USA. Inflation has been subdued for years and has recently declined further, so there is absolutely no justification for a rate hike. Labor participation among prime age adults remains lower than before the recession. And yet the Fed seems absolutely determined to raise rates, even though there is no conceivable good that can come from this action. Edit: Please see: http://marginalrevolution.com/marginalrevolution/2015/12/economists-dont-know-what-they-are-talking-about.html http://marginalrevolution.com/marginalrevolution/2015/12/eco...

Alupis 11y ago
What more, the Fed (Yellen) keeps teasing a rate hike every few weeks or so, and has been doing so for months, only to never follow-through. Every time they tease it then don't act, the market takes a plunge.
- jobu 11y ago
  > Every time they tease it then don't act, the market takes a plunge. Pretty sure the order of events is flipped. Last few fed meetings have been preceded by one sort of terrible economic news or another. (Last time it was the China slowdown.) They've been indicating for a while that they would raise rates sometime in the second half of 2015, but it's been pushed off because raising rates when markets are weak could instigate an economic meltdown.
  - codexon 11y ago
    Before I thought it should be obvious that the stock market would go up when rates drop, and vice versa. But I remember one day about 1-2 months ago, the market plunged after the Feds said they might hold off on raising the rates and there wasn't any new bad economic news for a week. All over the news, pundits blamed it as a sign of weakness because the Feds didn't ignore the stock market chaos. And now the stock market is dropping again because a rate increase is becoming likely again. Whether or not rates go up or down, the direction of the stock market seems to be controlled by emotion or big investors that have access to secret information. Retail investors like us seem to be powerless and doomed to just hold our stocks while waiting for a recovery that could take decades to occur.

dragonwriter 11y ago

> If the Fed has been a bullish coach, the markets have been trusting fans, continually believing that an increase is imminent, only to have their expectations dashed. At last, however, the moment seems to have arrived. On December 16th, when the Fed’s rate-setting committee meets, it seems all but certain to raise rates. That's what the media said last meeting.

harmegido 11y ago
For what it's worth, the Fed Funds future markets are priced at a predicting a ~70% chance of a rate hike.

hofmann 11y ago

What I haven't been able to find out is how an interest rate hike by the Feds will change consumer borrowing (mortgages, cars, etc.). If the rate is going from 0% to 0.25% for the Fed loans, does that mean consumers will not see a rate hike, a rate hike of 0.3%, or multiples of that?

disgruntledphd2 11y ago
As the article says, most American mortgages are on fixed rates. You may see an increase in rates for non-mortgage borrowing.

carsongross 11y ago

Reminder, someone at the Fed thought negative rates in 2015 and 2016 were appropriate: https://marketrealist.imgix.net/uploads/2015/09/Sep-dot-plot.1.jpg https://marketrealist.imgix.net/uploads/2015/09/Sep-dot-plot... I'm not saying it was Yellen... But it was Yellen. If they were looking to shock-and-awe this market, talking hike and then going negative would do it. I have no idea what is going to happen.

zerstroyer 11y ago
Well negative interest rates could be appropriate for negative economic growth. So if we never allow for negative interest rates we never allow for negative economic growth. But if we ever want to achieve singularity, we have to allow our economy to shrink to (zero).

pdq 11y ago

This story has been "The Boy Who Cried Wolf" for more than the past year. Every 4 weeks they threaten and no change. I'm hoping they finally move, because rates have been too low too long. Yes I realize this is likely the worst time to raise rates in the past 5 years, but that's only because they waited too long.

ergothus 11y ago
"too low too long" Is there something inherently wrong with being low for a lengthy period of time? "Too low" is obviously bad (if true - my understanding differs, but I'm no expert), but is there any concern over "too long" if "too low" isn't true? (honest question - is a too stable rate itself a problem?) On to the "too low" part - My understanding is that Fed targets 2% inflation, and we've just not been there. Do you have reasons other than gut instinct to dislike the low rate? (Again, honest question, my understanding could very well be wrong).
- disgruntledphd2 11y ago
  I think that rising house prices in many parts of the world are directly connected to low rates. In general (over the last century or so) house prices have kept pace with inflation. It appears that with really low interest rates, property has become a good investment for the pools of capital sloshing around looking for a return. It would be my hope that increased rates could redirect some of this capital back into bonds and other non-property investments, which would be good for many people who are looking to buy houses. This is totally just a speculative theory though, I haven't really investigated the matter in detail.
- rquantz 11y ago
  In fact, the problem has been that rates aren't low enough, they are united by the zero lower bound. The natural interest rate would be several points in the negative.
  - pdq 11y ago
    In what universe could interest rates ever be negative and considered "natural"? Or even a zero interest rate being considered "natural". If you believe that to be true, what rational entity would take the risk of loaning out money to either lose money or get back solely their principal at some future time? And considering prices are inflating, this makes zero and negative interest rates even worse. Market interest rates reward the savers by risking their capital and loaning it to borrowers who can put that capital to work and pay back the lender both principal and interest.

rquantz 11y ago

The Fed is in a jam, though, because it faces asymmetric risks. If it raises rates too soon, its scope to cut them, should the economy then sour, is limited by the fact rates cannot fall far below zero. If it waits until inflation is stronger, it has unlimited capacity to raise rates to tame it. This to me is the key paragraph. Why not wait until we reach or exceed target inflation, when they risk tanking our still very fragile economy, and then being unable to do anything about it since rates would still be close to zero?

seansmccullough 11y ago
Because we will have a recession sometime in the next couple years, and if the Fed keeps interest rates at 0, it will have no ammunition when the time comes.
- TheCowboy 11y ago
  Raising the rates prematurely, you risk accidentally triggering a recession or weakening the economy, then you're forced to raise rates to prevent a recession caused from prematurely raising rates. Interest rates aren't something you can slowly raise without effect.
  - seansmccullough 11y ago
    The economy is the strongest it's been in 5 years, and you can't keep rates low forever.

seansmccullough 11y ago

Raising rates it a good thing: 1. It allows the Fed room to maneuver during the next recession (https://en.wikipedia.org/wiki/Zero_lower_bound https://en.wikipedia.org/wiki/Zero_lower_bound) 2. It will all investors to normalize their portfolios (http://blogs.wsj.com/moneybeat/2015/09/11/what-to-ask-before-you-reach-for-yield/ http://blogs.wsj.com/moneybeat/2015/09/11/what-to-ask-before...) 3. Savings accounts and fixed income will actually yield interest. The US economy is actually in pretty good shape: - Job creation has been solid (http://www.bls.gov/news.release/pdf/empsit.pdf http://www.bls.gov/news.release/pdf/empsit.pdf) - Unemployment has been declining for 5 years (https://research.stlouisfed.org/fred2/series/U6RATE https://research.stlouisfed.org/fred2/series/U6RATE <- U6 rate, includes under-employed and those who quit looking for work) - GDP is 20% higher than before the recession (https://research.stlouisfed.org/fred2/series/GDP https://research.stlouisfed.org/fred2/series/GDP https://research.stlouisfed.org/fred2/series/A191RL1Q225SBEA https://research.stlouisfed.org/fred2/series/A191RL1Q225SBEA) - Average pay is increasing (https://research.stlouisfed.org/fred2/series/CES0500000003 https://research.stlouisfed.org/fred2/series/CES0500000003 all workers, https://research.stlouisfed.org/fred2/series/AHETPI https://research.stlouisfed.org/fred2/series/AHETPI not including supervisors)