3 ms·

Bond rates move inversely to price. As the fed buys bonds, it raises the price which lowers the rate. As rates are lowered for things like mortgages and corpo

• asdff 5y ago
  Not everyone is a homeowner and on top of that not every homeowner has refinanced their home during covid. I don't think people are borrowing money to buy toilet paper or a golf club. How do lower rates for corporate loans affect behavior that's at the consumer level? I'm trying to understand this relationship better.
  • option_greek 5y ago
    It doesn't directly go from fed to toilet paper. It starts with fed, inflates assets like real estate, stocks, commodities and leaks into actual economy due to the expected returns on these assets. For example, rents, prices of hardware and capital intensive sectors, oil all go up because on one hand these are getting indirectly pumped up by suppressed yields on bonds thanks to fed while on the other hand they are also getting consumed by economy (industry/people) which has to pay more to match the appreciation in prices to use/consume them. All this results in higher wage expectations due to people expecting higher wages based on higher prices (gasoline, cars etc) which moves the fed money to people's hands and increases the prices of consumer goods including fmcg like TP. As you can see there is a long link from cause to effect which is why we are seeing the slow increase in inflation. In many sectors like agriculture this is not even priced in yet as they are ultra competitive. But as their inputs go up (people and raw materials, hardware ), they will also have to increase prices. Even when eventually fed raises rates or tapers their buying, prices once gone up have a way of sticking around unless efficiency improvements like automation reduce input costs.
    • asdff 5y ago
      Are people actually seeing higher wages on the whole? Some cities have raised minimum wages like a few dollars more an hour but minimum wages have not been keeping pace with inflation as it was. Has median wage gone up in this time? My understanding has been that wages have been pretty flat for middle income earners for years despite cost of living increases rising over these same years.
  • 300bps 5y ago
    Picture two scenarios: Scenario 1: Fed buys $20 billion of corporate bonds per month from Microsoft. Scenario 2: Fed does not buy $20 billion of corporate bonds per month from Microsoft. Consider all other things being equal, in the first scenario Microsoft's borrowing costs are drastically reduced. This means that Microsoft has more money. This means that Microsoft is able to hire more people, that the people that work for them get larger bonuses because they are typically tied to the profitability of the company. This puts more money into real people's hands to buy toilet paper and golf clubs. That then multiplies throughout the economy. Suggestions for additional reading if you are really interested in these things: 1. Money Multiplier https://www.albany.edu/~bd445/Economics_350_Money_and_Banking_Slides_Spring_2013/Money_Multiplier.pdf https://www.albany.edu/~bd445/Economics_350_Money_and_Bankin... 2. M1 vs M2 money supply https://www.investopedia.com/terms/m/moneysupply.asp https://www.investopedia.com/terms/m/moneysupply.asp 3. Fractional reserve banking https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investopedia.com/terms/f/fractionalreservebankin... 4. Fed open market operations https://www.investopedia.com/terms/o/openmarketoperations.asp https://www.investopedia.com/terms/o/openmarketoperations.as...
    • asdff 5y ago
      But do we see this trend, that companies are using these corporate bonds to hire more staff or raise wages vs just buying more of their own stock?
      • mensetmanusman 5y ago
        Mostly stock buy-backs to reward the capital holders (the top 0.1%) at inflated stock prices before they crash 20%.