15 ms·

Fed Ends Zero-Rate Era

427 points by lpage 11y ago

johnz133 11y ago
It'll be interesting to see how this affects the lending models spawned from low interest rates.
- woody223 11y ago
  From the FOMC statement, it doesn't sound like the low rate environment will disappear too suddenly: "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."
- MarlonPro 11y ago
  Looks like the stock market reacts positively to the rate hike. But its effect on the general population remains to be seen, specially in the mortgage industry. Will more people shun buying houses? Banks are more willing to lend money with higher interest rate.
  - itchyouch 11y ago
    I would imagine that housing will stay flat. New mortgages and new rentals will both increase in cost as lending costs rise. IIRC, generally, a higher interest rate environment will incentivize people to go from renting to home ownership as rents increase due to increase lending costs & lowered/flatter housing costs. Each 1% hike in interest reduces the leveraged buying power of all buyers about ~$21k per $1000 mortgage payment. $1000 @ 4% = 209k loan (30 yr) $1000 @ 5% = 188k loan (30 yr) $1000 @ 6% = 167k loan (30 yr) The maximum monthly payments for a mortgage are capped at 36-44% Debt-to-Income (DTI) ratio. At the 36% DTI, a hypothetical Joe with no debt making 10k/mo, will be approved for about $2000/mo mortgage. Today's market at 4% means Joe can get a $418k loan. By 2018, with interest rates moved up 2%, he would only be able to get a $334k loan with that same $2k. Banks make money on the rate arbitrage. Currently, they get money at .25% and loan it out at around 4%. I'm guessing they will be borrowing from the fed at 2% and loaning it out for around 5.75-6% if we stick to the 2% rate by 2018. But I think long-term mortgages are tied to treasury bonds. If it causes enough people to affect the lending volume, the mortgage lenders may be willing to take a small hit to their margins and try to make up for it in volume. I guess we will see. People generally aren't willing to sell their homes for a loss, so I'd imagine that realestate will stay relatively flat for a little bit.
    - mywittyname 11y ago
      Additionally, you can buy discount points to reduce the mortgage interest rate. So it's either a reduction of $21k as you said, or $3000 more due at closing to buy the discount.
deleted 11y ago
[deleted]
irln 11y ago
It will also be interesting to see how much of the FED Assets [1] will need to be sold directly or indirectly in open market action to get to their target rate. [1] http://www.federalreserve.gov/releases/h41/Current/ http://www.federalreserve.gov/releases/h41/Current/
- o_nate 11y ago
  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.
  - irln 11y ago
    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 accordance with generally accepted accounting principles, but the transaction changes some of the liabilities on the Federal Reserve’s balance sheet from deposits to reverse repos while the trade is outstanding." [1] https://www.newyorkfed.org/markets/rrp_faq.html https://www.newyorkfed.org/markets/rrp_faq.html
    - o_nate 11y ago
      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-removes-reverse-repo-cap-to-ensure-control-over-rates http://www.bloomberg.com/news/articles/2015-12-16/fed-remove...
    - AngrySkillzz 11y ago
      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/20151216a1.htm http://www.federalreserve.gov/newsevents/press/monetary/2015...
seansmccullough 11y ago
Finally! In 2-3 years bonds will actually yield something.
- MarlonPro 11y ago
  But existing bond investments will lose value because of selloffs :-(
  - mywittyname 11y ago
    Just hold them to maturity and there's no issue.
    - Renevith 11y ago
      Holding bonds to maturity vs. selling them and buying new bonds doesn't actually change the financial result. You could equally say "just sell them and buy new higher-yielding bonds and there's no issue," since the resulting yield over the whole period would be equal. Whether or not there's an issue depends whether your investment horizon matches your bond duration, or alternatively, whether you're comfortable with (or even aware of) the amount of rate risk you're taking compared with the return you're getting.
joe-mccann 11y ago
Sell volatility (VIX)
- theseatoms 11y ago
  Why?
lpage 11y ago
This was very much in line with expectations, ergo the muted reaction in the markets. It's worth noting that the Fed used gradual in lieu of measured to describe the increase. Measured implies a steady series of increases (announced every few meetings until the target rate is reached) versus a gradual approach in which there's a long term number in mind but no strict mandate on getting there - a dovish tone.
- o_nate 11y ago
  Agreed. Judging from the price action in emerging market currencies, which have been particularly sensitive to the Fed lately, it seems the statement was interpreted as being slightly more on the dovish end of expectations.
javiayala 11y ago
Hi HN, can someone please explain what are the implications here for the average-Joe?
- jdubs 11y ago
  Money becomes more expensive to borrow.
  - pen2l 11y ago
    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.
    - arbitrage 11y ago
      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.
      - monknomo 11y ago
        But if pen2l was a marginal borrower before the rate hike, this might have disqualified him (without a bigger down payment anyhow)
    - czinck 11y ago
      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.
chollida1 11y ago
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 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 people think this is the first of a few small rate hikes we'll see in the next 12 months. IMHO, this is good news for the US economy, - it will help give the the fed some wiggle room/ammunition to soften the fall when the next recession hits - a slowly raising rate could stimulate the economy by convincing companies to spend now on large projects rather than wait, ditto for housing/consumers Having said all that, keep in mind the rate hike is only 0.25% upping the overnight rate to 0.3% so this is likely to have an almost negligible impact on the every day consumer.
- kasey_junk 11y ago
  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.
  - theseatoms 11y ago
    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.
  - vinceguidry 11y ago
    I'm home shopping at the moment, and my mortgage broker told me that he noticed a large hike in mortgage rates, is that due to this announcement and that I should wait a few weeks before locking in a rate?
    - eli 11y ago
SeoxyS 11y ago
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.
- api 11y ago
  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?
  - stanleydrew 11y ago
    You are not clueless. It's just nearly impossible to draw an actionable line in the sand where on one side your valuation is sane and on the other it isn't. You certainly can't do that in any kind of general sense. Every startup is by definition unique. And there's almost always a way to justify a higher or lower valuation for any given company.
    - api 11y ago
      Oh sure, it's a judgement call. I would say as a founder that it's best to seek a high but not insane valuation, and of course the definition thereof depends on multiple factors: what I think a reasonable growth estimate is (while not under the influence of drugs), what the market is currently paying for capital (average, not outliers), etc. If every living multicellular organism on Earth would have to create an account on your service for it to be worth X, X is probably insane. If you have no meaningful revenue, then in most cases a valuation more than one standard deviation among the mean for your sector and maturity is probably nutty.
myth_buster 11y ago
Would this end up being the pivotal moment of this decade? There is already speculation of recession in the 12-18 month time frame[0] and the energy sector [1] is going downhill since April. I'm seeing some cities and suburbs expanding unlike anything in a while but how much of that could be sustained? To word it differently, did the Fed blink or are the underlying indicators where they want it to be? [0] Given the cyclic nature of recessions, we seem to have artificially delayed it a bit. [1] https://www.google.com/finance?catid=us-TRBC%3A50&ei=jLpxVtG1HZGx2AadjILoCQ https://www.google.com/finance?catid=us-TRBC%3A50&ei=jLpxVtG...
- ubercore 11y ago
  I've been understanding the energy market problems in terms of OPEC manipulations (both artificially high and low prices) more than anything else. I think renewable energy is possibly bubbling, but still doing well?
- asr 11y ago
  Not sure I understand your question. Are you saying the fed is wrong here and raising rates into the teeth of a likely recession? If that's your question, good luck finding someone who knows the answer, but I will note that when the energy sector goes downhill because energy is cheap, that helps, not hurts, a lot of the rest of the economy--energy is an input.
roymurdock 11y ago
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.
- dsr_ 11y ago
  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.)
  - toomuchtodo 11y ago
    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 the economy, not the most wealthy. https://youtu.be/iJCcoF5K0SM?t=19m https://youtu.be/iJCcoF5K0SM?t=19m
    - vezzy-fnord 11y ago
      increasing the minimum wage Be careful what you wish for: http://marginalrevolution.com/marginalrevolution/2015/03/how-effective-is-the-minimum-wage-at-supporting-the-poor.html 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 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.
noname123 11y ago
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%)
- prospero 11y ago
  The mode return for VC funds is, and will always be, a net loss.
jayess 11y ago
Markets are cheering central planning and price fixing. Yay!
marcusgarvey 11y ago
Keep an eye on emerging market bonds and high-yield bonds. The latter was already looking a little shaky prior to today.
chad_strategic 11y ago
Unicorns can't exist in ZIRP. (Zero Interest Rate Policy)
- reefoctopus 11y ago
  Why not?
  - chad_strategic 11y ago
    Because as soon as you can get a risk free rate of return, (savings) then why would someone invest in a half brained start up that has a low probability of any return, when you could get a risk free return. The FED has reduced interest rates to drive spending in startups, lending, housing market, and the stock market. But don't worry, .5% is only a start, we have a ways to go before Unicorns start to starve.
    - dragonwriter 11y ago
      > Because as soon as you can get a risk free rate of return, (savings) then why would someone invest in a half brained start up that has a low probability of any return, when you could get a risk free return. Because startups, while they may have a low probability of return, have a high potential upside, whereas low-risk (and essentially zero-risk, like US government debt) investments have fairly locked-in maximums as well as minimums. Sure, the higher returns in low-risk investments, the better returns have to be in high-risk investments to justify choosing the latter over the former with the same risk sensitivity.
      - chad_strategic 11y ago
        You should look into the probability of those high returns. The media likes to remind you of the Facebook / twitters/ google, but those are just one in thousands. Something like ~90% of startup fail. http://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about-the-10/ http://www.forbes.com/sites/neilpatel/2015/01/16/90-of-start... So you have a one in ten chance. If you pick a startup that fails, I doubt you will be able to reclaim any of your investment. It's not like you can get liquid, when things start to go in the wrong direction. Pick wisely.
huac 11y ago
Markets predicting and 'pricing-in' Fed actions is not evidence that this rate hike is meaningless. But if you want to feel pessimistic about the hike, here's the corresponding Zerohedge 'article': http://www.zerohedge.com/news/2015-12-16/fed-hikes-rates-unleashing-first-tightening-cycle-over-11-years http://www.zerohedge.com/news/2015-12-16/fed-hikes-rates-unl...
gotchange 11y ago
Fed => Wall St. Bankers => Private Eguity/Venture Capital => Silicon Valley => Start-ups (disruption in labor market & layoffs) => leaner corporations and more profits $$$ => Wall St. Bankers => PE/VC ad infinitum You get the picture by now where's the Fed's loyalty lies in this reverse Robin Hood wealth redistribution scheme. Isn't capitalism wonderful?
- jstalin 11y ago
  Central banking is essentially a price-fixing scheme and doesn't really have much to do with capitalism.
  - gotchange 11y ago
    With all due respect, just ask any fat cat on Wall St. about the Fed or the role of central banks in the economy and he would assert that those institutions are essential for the global economy to function correctly and they are really upapologitically capitalists and they wear the label as a badge of honor.
    - jstalin 11y ago
      They're "capitalists" as long as they have a thumb on the scale, but they're not really capitalists who would cheer a true free market in currency.
      - mywittyname 11y ago
        The USD is about as free market as a currency can be reasonably obtain. The Fed allows the market to drive the money supply through lending. Institutional banks can effectively create an unlimited supply of money on demand through lending; they just ask the Fed for money and pay the discount rate. So it's largely the market that drives short and medium term inflation through borrowing. The Fed uses treasury bonds to balance the money supply. It's not a perfect system, but it's the best system we know of.
downandout 11y ago
This will have an impact on the flow of money to VC's, which will have an impact on the flow of burnable cash to unprofitable startups. No more $1.5 million rounds for apps like Yo [1] (the investor community should be embarrassed and horrified that this kind of thing was getting financed anyway). Winter is indeed coming for those that don't have a business model, and that's a good thing. [1] http://www.businessinsider.com/yo-raises-15-million-at-a-5-10-million-valuation-2014-7 http://www.businessinsider.com/yo-raises-15-million-at-a-5-1...
- shostack 11y ago
  I wonder how big an impact this will have though. As much as there are apps without business models, there are many solid products solving real problems that already have real revenue and customers behind them contrary to the dotcom bubble. Sure some tightening of the belt might happen, but is there really any way to say how much?
- rlucas 11y ago
  No, the institutions who allocate money to VC typically do so as part of a long (> 30 year) horizon plan based upon portfolio theory. There are no institutional investors for whom a 25 bp change in a short term interest rate will materially alter their allocation to VC (typically a tiny sub-portion of a minor portion allocated to "private equity," the lion's share of which goes to later-stage buyout). Private equity and, in particular, venture capital, are part of that allocation precisely because their outcomes are relatively uncorrelated to, say, public stocks and bonds -- which are very correlated to interest rates.
  - downandout 11y ago
    The flow of easy money to VC's has dramatically increased because of zero/negative interest rates - not just in the US but around the world. That flow of money will slow in a positive interest rate environment, which means less money for low quality startups.
  - tdaltonc 11y ago
    This is what I keep thinking. People are talking about an imminent winter, but I don't see how VC money could drain out that fast.
narrator 11y ago
What is this going to do to interest payments on the national debt? Will this put a squeeze on spending? Cause tax increases? Or will it be business as usual and the fed buy as many bonds as needed? In the latter case, I think that will cause inflation to pick up unless we can export it all out the trade deficit.
- dragonwriter 11y ago
  > What is this going to do to interest payments on the national debt? Will this put a squeeze on spending? Cause tax increases? Spending and taxes are driven by political decisions which can remain extremely distant from any clear relation to the market for quite a long time, so the effect a rate hike like this has on fiscal policy is (even after the fact) murky at best -- even once we know future policy, there will be as many theories as observers as to the contribution of monetary circumstances to those policies.
carsongross 11y ago
To modify Andrew Jackson: "The Fed has raised its funds rate; now lets see them enforce it."
panglott 11y ago
Why can't we just have a boom?
- harryh 11y ago
  We are having a boom. It's in East Asia and it's been going on for decades.
enahs-sf 11y ago
Does this mean that buying a home in San Francisco, where 1/4 of the homes sold are all cash, just got a little bit more difficult?
- vecter 11y ago
  Most of those cash buyers are wealthy Chinese people living in China. I doubt this will change that.
  - cpeterso 11y ago
    I read that more cash buyers are American retirees than wealthy people living in China.
daodedickinson 11y ago
Need is the construction of the world order; satiety is the universal conflagration. (Kahn translating Heraclitus) If you want to stoke consumer demand in a country where the poor have massive televisions and cable, maybe notch up the bullying of people wearing cheaper brands and carrying fake designer brands and charge 30 grand for VR headsets but advertise them during the Super Bowl? I dunno. I've never even had a real job and there aren't any gadgets I want and I want to get more crap out of my house than I want to add. Eliting schooling for hypothetical kids I'll probably never have is the only big ticket purchase I can seem to summon strong desire for.
peignoir 11y ago
making some reserves for the next crisis?
randomname2 11y ago
Analysis from TD on how banks (Wells Fargo, US Bankcorp, JPMorgan, M&T, PNC, Citi) rushed to hike the prime rate to 3.50%, and forgot to increase the deposit rate: As CNBC reported [1], "a change in the federal funds rate will have no impact on the interest rates on existing fixed-rate mortgage and other fixed-rate consumer loans, a Wells Fargo representative told CNBC. Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said." The good news: the rates on mortgages, auto loans or college tuition aren't expected to jump anytime soon, according to AP, although in time those will rise as well unless the long-end of the curve flattens even more than the 25 bps increase on the short end. What about the other end of the question: the interest banks pay on deposits? Well, no rush there: "We won't automatically change deposit rates because they aren't tied directly to the prime," a JPMorgan Chase spokesperson told CNBC. "We'll continue to monitor the market to make sure we stay competitive." Bottom line: for those who carry a balance on their credit cards, their interest payment is about to increase. Meanwhile, those who have savings at US banks, please don't hold your breath to see any increase on the meager interest said deposits earn: after all banks are still flooded with about $2.5 trillion in excess reserves, which means that the last thing banks care about is being competitive when attracting deposits. [1] http://www.cnbc.com/2015/12/16/wells-fargo-bank-announced-wednesday-it-would-increase-its-prime-rate-to-35-percent.html http://www.cnbc.com/2015/12/16/wells-fargo-bank-announced-we...
- toomuchtodo 11y ago
  > Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said. > "We won't automatically change deposit rates because they aren't tied directly to the prime," a JPMorgan Chase spokesperson told CNBC. "We'll continue to monitor the market to make sure we stay competitive." Heads I win, tails you lose.
  - gohrt 11y ago
    Does it matter though? 21st Century, everyone with savings can open a Vanguard mutual fund account with the risk/reward profile of their choosing, that's almost as convenient wrt withdrawals.
randyrand 11y ago
So this helps people with savings in certain types of investments, right?
nkassis 11y ago
I was thinking about this earlier and I have a question about inflation. Could increasing the interest rate cause inflation to rise a bit in the near term? My reasoning for this is that given that banks were borrowing at near zero, could they have had no real reason to put all the borrowed money to work since it wasn't costing them anything to hold it in reserve for later when the rates did increase? Now that the rates are increasing would they not have to use the money a bit to ensure they stay ahead of the interest rates. I was also thinking that there is a threshold at which banks wouldn't have any more money that is just sitting there and having to borrow at higher rates reduces their demand for new funds from the fed thus undoing this initial effect to the hike. Hopefully this isn't completely naive. Please let me know if I'm misunderstanding how the fed and banks relationship works.

427 points by lpage 11y ago

johnz133 11y ago

It'll be interesting to see how this affects the lending models spawned from low interest rates.

woody223 11y ago
From the FOMC statement, it doesn't sound like the low rate environment will disappear too suddenly: "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."
MarlonPro 11y ago
Looks like the stock market reacts positively to the rate hike. But its effect on the general population remains to be seen, specially in the mortgage industry. Will more people shun buying houses? Banks are more willing to lend money with higher interest rate.
- itchyouch 11y ago
  I would imagine that housing will stay flat. New mortgages and new rentals will both increase in cost as lending costs rise. IIRC, generally, a higher interest rate environment will incentivize people to go from renting to home ownership as rents increase due to increase lending costs & lowered/flatter housing costs. Each 1% hike in interest reduces the leveraged buying power of all buyers about ~$21k per $1000 mortgage payment. $1000 @ 4% = 209k loan (30 yr) $1000 @ 5% = 188k loan (30 yr) $1000 @ 6% = 167k loan (30 yr) The maximum monthly payments for a mortgage are capped at 36-44% Debt-to-Income (DTI) ratio. At the 36% DTI, a hypothetical Joe with no debt making 10k/mo, will be approved for about $2000/mo mortgage. Today's market at 4% means Joe can get a $418k loan. By 2018, with interest rates moved up 2%, he would only be able to get a $334k loan with that same $2k. Banks make money on the rate arbitrage. Currently, they get money at .25% and loan it out at around 4%. I'm guessing they will be borrowing from the fed at 2% and loaning it out for around 5.75-6% if we stick to the 2% rate by 2018. But I think long-term mortgages are tied to treasury bonds. If it causes enough people to affect the lending volume, the mortgage lenders may be willing to take a small hit to their margins and try to make up for it in volume. I guess we will see. People generally aren't willing to sell their homes for a loss, so I'd imagine that realestate will stay relatively flat for a little bit.
  - mywittyname 11y ago
    Additionally, you can buy discount points to reduce the mortgage interest rate. So it's either a reduction of $21k as you said, or $3000 more due at closing to buy the discount.

deleted 11y ago

[deleted]

irln 11y ago

It will also be interesting to see how much of the FED Assets [1] will need to be sold directly or indirectly in open market action to get to their target rate. [1] http://www.federalreserve.gov/releases/h41/Current/ http://www.federalreserve.gov/releases/h41/Current/

o_nate 11y ago
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.
- irln 11y ago
  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 accordance with generally accepted accounting principles, but the transaction changes some of the liabilities on the Federal Reserve’s balance sheet from deposits to reverse repos while the trade is outstanding." [1] https://www.newyorkfed.org/markets/rrp_faq.html https://www.newyorkfed.org/markets/rrp_faq.html
  - o_nate 11y ago
    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-removes-reverse-repo-cap-to-ensure-control-over-rates http://www.bloomberg.com/news/articles/2015-12-16/fed-remove...
  - AngrySkillzz 11y ago
    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/20151216a1.htm http://www.federalreserve.gov/newsevents/press/monetary/2015...

seansmccullough 11y ago

Finally! In 2-3 years bonds will actually yield something.

MarlonPro 11y ago
But existing bond investments will lose value because of selloffs :-(
- mywittyname 11y ago
  Just hold them to maturity and there's no issue.
  - Renevith 11y ago
    Holding bonds to maturity vs. selling them and buying new bonds doesn't actually change the financial result. You could equally say "just sell them and buy new higher-yielding bonds and there's no issue," since the resulting yield over the whole period would be equal. Whether or not there's an issue depends whether your investment horizon matches your bond duration, or alternatively, whether you're comfortable with (or even aware of) the amount of rate risk you're taking compared with the return you're getting.

joe-mccann 11y ago

Sell volatility (VIX)

theseatoms 11y ago
Why?

lpage 11y ago

This was very much in line with expectations, ergo the muted reaction in the markets. It's worth noting that the Fed used gradual in lieu of measured to describe the increase. Measured implies a steady series of increases (announced every few meetings until the target rate is reached) versus a gradual approach in which there's a long term number in mind but no strict mandate on getting there - a dovish tone.

o_nate 11y ago
Agreed. Judging from the price action in emerging market currencies, which have been particularly sensitive to the Fed lately, it seems the statement was interpreted as being slightly more on the dovish end of expectations.

javiayala 11y ago

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

jdubs 11y ago
Money becomes more expensive to borrow.
- pen2l 11y ago
  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.
  - arbitrage 11y ago
    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.
    - monknomo 11y ago
      But if pen2l was a marginal borrower before the rate hike, this might have disqualified him (without a bigger down payment anyhow)
  - czinck 11y ago
    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.

chollida1 11y ago

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 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 people think this is the first of a few small rate hikes we'll see in the next 12 months. IMHO, this is good news for the US economy, - it will help give the the fed some wiggle room/ammunition to soften the fall when the next recession hits - a slowly raising rate could stimulate the economy by convincing companies to spend now on large projects rather than wait, ditto for housing/consumers Having said all that, keep in mind the rate hike is only 0.25% upping the overnight rate to 0.3% so this is likely to have an almost negligible impact on the every day consumer.

kasey_junk 11y ago
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.
- theseatoms 11y ago
  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.
- vinceguidry 11y ago
  I'm home shopping at the moment, and my mortgage broker told me that he noticed a large hike in mortgage rates, is that due to this announcement and that I should wait a few weeks before locking in a rate?
  - eli 11y ago

SeoxyS 11y ago

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.

api 11y ago
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?
- stanleydrew 11y ago
  You are not clueless. It's just nearly impossible to draw an actionable line in the sand where on one side your valuation is sane and on the other it isn't. You certainly can't do that in any kind of general sense. Every startup is by definition unique. And there's almost always a way to justify a higher or lower valuation for any given company.
  - api 11y ago
    Oh sure, it's a judgement call. I would say as a founder that it's best to seek a high but not insane valuation, and of course the definition thereof depends on multiple factors: what I think a reasonable growth estimate is (while not under the influence of drugs), what the market is currently paying for capital (average, not outliers), etc. If every living multicellular organism on Earth would have to create an account on your service for it to be worth X, X is probably insane. If you have no meaningful revenue, then in most cases a valuation more than one standard deviation among the mean for your sector and maturity is probably nutty.

myth_buster 11y ago

Would this end up being the pivotal moment of this decade? There is already speculation of recession in the 12-18 month time frame[0] and the energy sector [1] is going downhill since April. I'm seeing some cities and suburbs expanding unlike anything in a while but how much of that could be sustained? To word it differently, did the Fed blink or are the underlying indicators where they want it to be? [0] Given the cyclic nature of recessions, we seem to have artificially delayed it a bit. [1] https://www.google.com/finance?catid=us-TRBC%3A50&ei=jLpxVtG1HZGx2AadjILoCQ https://www.google.com/finance?catid=us-TRBC%3A50&ei=jLpxVtG...

ubercore 11y ago
I've been understanding the energy market problems in terms of OPEC manipulations (both artificially high and low prices) more than anything else. I think renewable energy is possibly bubbling, but still doing well?
asr 11y ago
Not sure I understand your question. Are you saying the fed is wrong here and raising rates into the teeth of a likely recession? If that's your question, good luck finding someone who knows the answer, but I will note that when the energy sector goes downhill because energy is cheap, that helps, not hurts, a lot of the rest of the economy--energy is an input.

roymurdock 11y ago

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.

dsr_ 11y ago
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.)
- toomuchtodo 11y ago
  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 the economy, not the most wealthy. https://youtu.be/iJCcoF5K0SM?t=19m https://youtu.be/iJCcoF5K0SM?t=19m
  - vezzy-fnord 11y ago
    increasing the minimum wage Be careful what you wish for: http://marginalrevolution.com/marginalrevolution/2015/03/how-effective-is-the-minimum-wage-at-supporting-the-poor.html 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 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.

noname123 11y ago

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%)

prospero 11y ago
The mode return for VC funds is, and will always be, a net loss.

jayess 11y ago

Markets are cheering central planning and price fixing. Yay!

marcusgarvey 11y ago

Keep an eye on emerging market bonds and high-yield bonds. The latter was already looking a little shaky prior to today.

chad_strategic 11y ago

Unicorns can't exist in ZIRP. (Zero Interest Rate Policy)

reefoctopus 11y ago
Why not?
- chad_strategic 11y ago
  Because as soon as you can get a risk free rate of return, (savings) then why would someone invest in a half brained start up that has a low probability of any return, when you could get a risk free return. The FED has reduced interest rates to drive spending in startups, lending, housing market, and the stock market. But don't worry, .5% is only a start, we have a ways to go before Unicorns start to starve.
  - dragonwriter 11y ago
    > Because as soon as you can get a risk free rate of return, (savings) then why would someone invest in a half brained start up that has a low probability of any return, when you could get a risk free return. Because startups, while they may have a low probability of return, have a high potential upside, whereas low-risk (and essentially zero-risk, like US government debt) investments have fairly locked-in maximums as well as minimums. Sure, the higher returns in low-risk investments, the better returns have to be in high-risk investments to justify choosing the latter over the former with the same risk sensitivity.
    - chad_strategic 11y ago
      You should look into the probability of those high returns. The media likes to remind you of the Facebook / twitters/ google, but those are just one in thousands. Something like ~90% of startup fail. http://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about-the-10/ http://www.forbes.com/sites/neilpatel/2015/01/16/90-of-start... So you have a one in ten chance. If you pick a startup that fails, I doubt you will be able to reclaim any of your investment. It's not like you can get liquid, when things start to go in the wrong direction. Pick wisely.

huac 11y ago

Markets predicting and 'pricing-in' Fed actions is not evidence that this rate hike is meaningless. But if you want to feel pessimistic about the hike, here's the corresponding Zerohedge 'article': http://www.zerohedge.com/news/2015-12-16/fed-hikes-rates-unleashing-first-tightening-cycle-over-11-years http://www.zerohedge.com/news/2015-12-16/fed-hikes-rates-unl...

gotchange 11y ago

Fed => Wall St. Bankers => Private Eguity/Venture Capital => Silicon Valley => Start-ups (disruption in labor market & layoffs) => leaner corporations and more profits $$$ => Wall St. Bankers => PE/VC ad infinitum You get the picture by now where's the Fed's loyalty lies in this reverse Robin Hood wealth redistribution scheme. Isn't capitalism wonderful?

jstalin 11y ago
Central banking is essentially a price-fixing scheme and doesn't really have much to do with capitalism.
- gotchange 11y ago
  With all due respect, just ask any fat cat on Wall St. about the Fed or the role of central banks in the economy and he would assert that those institutions are essential for the global economy to function correctly and they are really upapologitically capitalists and they wear the label as a badge of honor.
  - jstalin 11y ago
    They're "capitalists" as long as they have a thumb on the scale, but they're not really capitalists who would cheer a true free market in currency.
    - mywittyname 11y ago
      The USD is about as free market as a currency can be reasonably obtain. The Fed allows the market to drive the money supply through lending. Institutional banks can effectively create an unlimited supply of money on demand through lending; they just ask the Fed for money and pay the discount rate. So it's largely the market that drives short and medium term inflation through borrowing. The Fed uses treasury bonds to balance the money supply. It's not a perfect system, but it's the best system we know of.

downandout 11y ago

This will have an impact on the flow of money to VC's, which will have an impact on the flow of burnable cash to unprofitable startups. No more $1.5 million rounds for apps like Yo [1] (the investor community should be embarrassed and horrified that this kind of thing was getting financed anyway). Winter is indeed coming for those that don't have a business model, and that's a good thing. [1] http://www.businessinsider.com/yo-raises-15-million-at-a-5-10-million-valuation-2014-7 http://www.businessinsider.com/yo-raises-15-million-at-a-5-1...

shostack 11y ago
I wonder how big an impact this will have though. As much as there are apps without business models, there are many solid products solving real problems that already have real revenue and customers behind them contrary to the dotcom bubble. Sure some tightening of the belt might happen, but is there really any way to say how much?
rlucas 11y ago
No, the institutions who allocate money to VC typically do so as part of a long (> 30 year) horizon plan based upon portfolio theory. There are no institutional investors for whom a 25 bp change in a short term interest rate will materially alter their allocation to VC (typically a tiny sub-portion of a minor portion allocated to "private equity," the lion's share of which goes to later-stage buyout). Private equity and, in particular, venture capital, are part of that allocation precisely because their outcomes are relatively uncorrelated to, say, public stocks and bonds -- which are very correlated to interest rates.
- downandout 11y ago
  The flow of easy money to VC's has dramatically increased because of zero/negative interest rates - not just in the US but around the world. That flow of money will slow in a positive interest rate environment, which means less money for low quality startups.
- tdaltonc 11y ago
  This is what I keep thinking. People are talking about an imminent winter, but I don't see how VC money could drain out that fast.

narrator 11y ago

What is this going to do to interest payments on the national debt? Will this put a squeeze on spending? Cause tax increases? Or will it be business as usual and the fed buy as many bonds as needed? In the latter case, I think that will cause inflation to pick up unless we can export it all out the trade deficit.

dragonwriter 11y ago
> What is this going to do to interest payments on the national debt? Will this put a squeeze on spending? Cause tax increases? Spending and taxes are driven by political decisions which can remain extremely distant from any clear relation to the market for quite a long time, so the effect a rate hike like this has on fiscal policy is (even after the fact) murky at best -- even once we know future policy, there will be as many theories as observers as to the contribution of monetary circumstances to those policies.

carsongross 11y ago

To modify Andrew Jackson: "The Fed has raised its funds rate; now lets see them enforce it."

panglott 11y ago

Why can't we just have a boom?

harryh 11y ago
We are having a boom. It's in East Asia and it's been going on for decades.

enahs-sf 11y ago

Does this mean that buying a home in San Francisco, where 1/4 of the homes sold are all cash, just got a little bit more difficult?

vecter 11y ago
Most of those cash buyers are wealthy Chinese people living in China. I doubt this will change that.
- cpeterso 11y ago
  I read that more cash buyers are American retirees than wealthy people living in China.

daodedickinson 11y ago

Need is the construction of the world order; satiety is the universal conflagration. (Kahn translating Heraclitus) If you want to stoke consumer demand in a country where the poor have massive televisions and cable, maybe notch up the bullying of people wearing cheaper brands and carrying fake designer brands and charge 30 grand for VR headsets but advertise them during the Super Bowl? I dunno. I've never even had a real job and there aren't any gadgets I want and I want to get more crap out of my house than I want to add. Eliting schooling for hypothetical kids I'll probably never have is the only big ticket purchase I can seem to summon strong desire for.

peignoir 11y ago

making some reserves for the next crisis?

randomname2 11y ago

Analysis from TD on how banks (Wells Fargo, US Bankcorp, JPMorgan, M&T, PNC, Citi) rushed to hike the prime rate to 3.50%, and forgot to increase the deposit rate: As CNBC reported [1], "a change in the federal funds rate will have no impact on the interest rates on existing fixed-rate mortgage and other fixed-rate consumer loans, a Wells Fargo representative told CNBC. Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said." The good news: the rates on mortgages, auto loans or college tuition aren't expected to jump anytime soon, according to AP, although in time those will rise as well unless the long-end of the curve flattens even more than the 25 bps increase on the short end. What about the other end of the question: the interest banks pay on deposits? Well, no rush there: "We won't automatically change deposit rates because they aren't tied directly to the prime," a JPMorgan Chase spokesperson told CNBC. "We'll continue to monitor the market to make sure we stay competitive." Bottom line: for those who carry a balance on their credit cards, their interest payment is about to increase. Meanwhile, those who have savings at US banks, please don't hold your breath to see any increase on the meager interest said deposits earn: after all banks are still flooded with about $2.5 trillion in excess reserves, which means that the last thing banks care about is being competitive when attracting deposits. [1] http://www.cnbc.com/2015/12/16/wells-fargo-bank-announced-wednesday-it-would-increase-its-prime-rate-to-35-percent.html http://www.cnbc.com/2015/12/16/wells-fargo-bank-announced-we...

toomuchtodo 11y ago
> Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said. > "We won't automatically change deposit rates because they aren't tied directly to the prime," a JPMorgan Chase spokesperson told CNBC. "We'll continue to monitor the market to make sure we stay competitive." Heads I win, tails you lose.
- gohrt 11y ago
  Does it matter though? 21st Century, everyone with savings can open a Vanguard mutual fund account with the risk/reward profile of their choosing, that's almost as convenient wrt withdrawals.

randyrand 11y ago

So this helps people with savings in certain types of investments, right?

nkassis 11y ago

I was thinking about this earlier and I have a question about inflation. Could increasing the interest rate cause inflation to rise a bit in the near term? My reasoning for this is that given that banks were borrowing at near zero, could they have had no real reason to put all the borrowed money to work since it wasn't costing them anything to hold it in reserve for later when the rates did increase? Now that the rates are increasing would they not have to use the money a bit to ensure they stay ahead of the interest rates. I was also thinking that there is a threshold at which banks wouldn't have any more money that is just sitting there and having to borrow at higher rates reduces their demand for new funds from the fed thus undoing this initial effect to the hike. Hopefully this isn't completely naive. Please let me know if I'm misunderstanding how the fed and banks relationship works.