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Federal Reserve to increase interest rates by 75 basis points for the third time
- clarkrinker 4y agoI was wondering why they don't move the interest rate up continuously over a period instead of flat jumps. Is the shock of jumping up in one day useful economically? That would be slightly confusing, because it seems like I'm always reading that the market has already priced in changes to the interest rate by the time the announcement comes out.
- maxfurman 4y agoThey still need to price contracts between jumps. If they move it "continuously," then the rate at any given moment is difficult to determine. Hopefully no one is using javascript to calculate it!
- jpgvm 4y agoIt's a coarse enough instrument that changing it only a few times a year still spreads the effect out over the whole year and even if it was continuous announcing a change in the rate of change will have exactly the same effect.
- nonameiguess 4y agoThey actually do. The announcement is them saying what they target the rise to be. It may be slightly more or slightly less and it's not instantaneous. Direct lending to banks is an instrument available, but most of their influence comes from open market operations, which only indirectly impacts prevailing interest rates and consists of more or less continuous buying and selling of existing debt, which doesn't all happen on the day of the announcement.
- markus_zhang 4y agoI'm wondering if they are going to bite the bullet and raise like Volcker. But again I realized that I actually do not understand the source of inflation and how much contribution each source has. We all know that the war, Covid and monetary policy are three sources but are there other structural sources? What about the trade quarrel between US and China? How much does it hurt for each industry? I should read some papers and talk to people in different industries to get some ideas.
- splitstud 4y ago
- maxfurman 4y agoMy understanding is that the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to stomach.
- changoplatanero 4y agoHarm to who? Aren’t rate hikes beneficial to entities that have a lot of debt?
- bobthepanda 4y agoThe US rolls over debt by paying off debt with new debt. So interest rate hikes would eventually lead to a hike in interest payments on bonds. A sharp increase in bond interest payments set off the Greek crisis.
- mrgalaxy 4y agoI’m no expert here, so someone by all means correct me, but my understanding is that the fed rate correlates to the rate of interest the government has to pay on its debts. The higher the rate, the larger the chance that the government defaults which for the US would be catastrophic.
- olivermarks 4y ago@mrgalaxy So long as the US onshore Dollar and offshore 'petrodollar' remain as the reserve currency of the planet default is unlikely as they essentially control all our planets money and can print more and more, or reduce money supply. It is good to be king.
- JamesBarney 4y agoThe US can't be forced to default. They can literally print money.
- barelysapient 4y agoI haven't seen any reporting on how the recent and huge amounts of QE might factor into all of this. In my primate mind, wouldn't ongoing QE curb the impact of rising interest rates on inflation?
- datalopers 4y agoQE was ended in March, and we're in full QT now.
- barelysapient 4y agoEnded; but there's still about $8T on the books of past QE right? https://www.businessinsider.com/personal-finance/quantitative-easing https://www.businessinsider.com/personal-finance/quantitativ...
- JumpCrisscross 4y ago> there's still about $8T on the books of past QE right? Yes, about $8.8tn [1]. The Fed is running them off at about $60n a month [2]. (The Fed's optimal balance sheet is estimated to be around $4tn [3].) The elephant in the room is the Fed's mortgages [4][5]. Those will have to start being sold soon, since rising rates mean mortgagers aren't refinancing and thus a run-off strategy doesn't reduce holdings. [1] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... [2] https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... [3] https://advisors.vanguard.com/insights/article/thefedsplantoshrinkitsbalancesheetquickly https://advisors.vanguard.com/insights/article/thefedsplanto... [4] https://www.ft.com/content/1a2e829e-de82-4083-abcb-ceeb46a456c4 https://www.ft.com/content/1a2e829e-de82-4083-abcb-ceeb46a45... [5] https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB
- bombcar 4y agoThe sparks will really fly when they begin to require FNMA and FHLMC conforming loans be assumable.
- bendbro 4y agoOw, my 3x leveraged ETFs aren't looking so good.
- paulpauper 4y agohow many people are buying these? It seems like the popularity of 3x funds has exploded over the past 2 years.
- mountainofdeath 4y agoYou would be surprised how many brand-new investors through their money in 3x levered ETFs and/or way out-of-the-money options and were right 3/4ths of time on accident. High school students were writing Hedge Fund managers asking for jobs as they did ridiculously well through blind luck.
- mountainofdeath 4y agoSame here. Luckily, I pulled out of pretty much all of them in February when Putin invaded and I saw the writing on the wall.
- dougmwne 4y agoGiven that mortgage rates recently rose past 6%, seems to me this latest rate increase is going to put strong pressure on house prices. The rate has a huge impact on the monthly payment required to service a loan, more so than is immediately apparent without doing the math.
- jollyllama 4y agoQuite possibly. It depends on what happens to supply and how desperate people are to sell.
- plandis 4y agoGood time to buy if you’re wealthy with cash on hand.
- jayski 4y agocan you elaborate a little more?
- colinmhayes 4y agoThe biggest advantage of real estate investing is the easy access to cheap, reliable leverage. This is absolutely not a good time to get into a business that requires debt 4x higher than equity to make money.
- friedman23 4y agoAs someone that has been exploring real estate for the first time, after speaking with some people it seems that mortgages have generally been less expensive than rent? Good luck finding something like that with today's prices and interest rates.
- maxfurman 4y agoI'll echo what some folks have said in other threads, we've had rates down near zero for fifteen years, and we've got to get them back somewhere near historic normals at some point. If only so they can be cut again during the next crisis. How much is our entire culture the result of cheap money?
- ferdowsi 4y agoA substantial chunk of the tech industry are speculative zombie companies that are built on the edifice of zero interest.
- Victerius 4y agoLet them fail.
- arberx 4y agoSince tech companies use other tech company's products this implies the tech industry is a speculative bubble.
- mym1990 4y agoI'm not sure dependency implies a bubble, rather a risk. For companies like Amazon(AWS), there certainly is an element of being too big to fail because AWS and similar cloud operations provide so much of the infrastructure for other applications. The bubble can clearly be seen by the disassociation of valuations from the underlying value, which for many new companies is nothing.
- hot_gril 4y agoIt is partially. There's some basis in reality since it's actually very profitable overall, but the investment goes beyond reality. I'm not saying you shouldn't invest in tech. It's possible this bubble never goes away.
- spaceman_2020 4y agoValuations are definitely in a bubble Most of these unicorns simply can't turn a profit with their current cost structures. And even if they do, the profits will be so small that the valuations will simply not be justifiable.
- donsupreme 4y agothere is a whole generation of SWE who will face the reckoning that $400K total comp with RSU is far from the norm
- deleted 4y ago[deleted]
- mberning 4y agoSomething dramatic is going to have to happen for SWE salaries to drop significantly. I have a feeling if SWEs take a 20%+ haircut on salaries things are going to be absolutely abysmal for people in other roles.
- throw_nbvc1234 4y agoWhat time scale are you thinking of? Short-term 20% haircut seems inevitable compared to 1-2 years ago with the caveat that nothing may be forcing you to sell any vested RSUs.
- jazzkingrt 4y agoMany of us have already dealt with a 20% haircut, at least on the RSU portion of compensation. * Higher cost of borrowing is putting pressure on growth companies that relied on cheap capital * Economic downturn makes it harder to do business and lowers stock prices, which makes up a big part of any 400K SWE package * Tech companies can allow RSU grants to expire rather than implementing formal paycuts. Whereas companies in other sectors might lay off 5% of the workforce before giving everyone a 5% paycut, we may see a different trend in tech.
- digianarchist 4y agoMy RSUs are down 70% from their post IPO peak.
- 11101010001100 4y agoquestion: is it illegal to setup a hedging instrument for this sort of thing?
- cs702 4y agoOn a related note, since mid-April, the Fed has withdrawn –$140B of liquidity from the financial system: https://news.ycombinator.com/item?id=32929454 https://news.ycombinator.com/item?id=32929454 and earlier this year announced that it plans to continue withdrawing liquidity from the financial system at the rate of $90B/month for the foreseeable future. The innocuous term for these withdrawals is "quantitative tightening." There are no historical precedents for quantitative tightening of this magnitude. It's the first time any central bank has tried it at this scale in a modern monetary regime.
- slaw 4y agoat $90B/month it will take 89 months to unload.
- cs702 4y ago$90B/month = $1.1T/year in withdrawals of liquidity from the financial system. A trillion here and trillion there, and pretty soon we'll be talking about real money.
- JumpCrisscross 4y ago> $90B/month it will take 89 months to unload The optimal Fed balance sheet is estimated to be around $4tn [1]. A Fed with a ballooning balance sheet distorts financial markets. A Fed with no assets must do weird stuff to fight inflation, which distorts financial markets. (In a non-reserve case, a central bank with no reserves goes bust.) [1] https://advisors.vanguard.com/insights/article/thefedsplantoshrinkitsbalancesheetquickly https://advisors.vanguard.com/insights/article/thefedsplanto...
- slaw 4y agoFed doesn't have to fight with inflation if it not creating one. So Fed's balance sheet could be as well $0
- JumpCrisscross 4y ago
- boiler_up800 4y agoI am seeing companies really start to feel these rate hikes and the corresponding market moves. I can’t tell where we are in the correction but it is definitely not at the start. I just hope it’s somewhere close to the middle.
- sbaiddn 4y agoThis wont help inflation, interest rates are still effectively negative when inflation is considered. What it will do is rise i interest payments on the US sovereign debt very significantly. The US has two options, as far as I can tell. 1. Slash govt. spending (entitlements and defense) and rise taxes on the laptop class (that's us folks!) 2. Accept structural inflation and high interest rates. The Dollar dominance is coming to an end, we weaponized it too much, so option 3, exporting inflation is out. Politically 2 is easier, but in the long run disastrous.
- Victerius 4y agoThe dollar survived the Great Depression, Bretton Woods, the oil supply shocks, the abolition of the gold standard, political games of brinkmanship over the debt ceiling, the War on Terror, the Great Financial Crisis, the Volcker shock, and Covid. The dollar's supremacy isn't going anywhere.
- uptownfunk 4y agoAgree if anything this will help the dollar supremacy and hurt the rest of the world.
- curiousllama 4y agoWasn't it Bretton Woods that _established_ USD dominance?
- actusual 4y agoWould appreciate some sources for these claims.
- eftychis 4y agoI am not even sure (1) is a practical option. Remember we have increased instability due to the Russo-Ukraine war. Thus, the U.S. Department of Defense is already getting and spending more money all while more money is spent on Ukraine aid -- which ends up in U.S. Defense industry hands. Entitlements not going to change, they should have but we are post pandemic, a lot of things are messy and we are in a midterm election season. And finally taxing the laptop class more might be politically taboo -- see midterm/future election note -- and improbable as a lot of shuffling has been taking place and over taxing might/will scar "unicorns and the VC" system way too much in the long run. Recall, you can't tax capital gains if there are no gains, but huge losses. And the laptop class taxation is based on capital gains I'd say. Option (3) is already in effect indirectly, due to inflation being world-wide, and Europe being hit much harder due to the conflict. Like every past pandemic this one is going to hit the economy like a sledgehammer... We failed, once again.
- norwalkbear 4y agoJust more regular people about to be laid off and suffer.
- dcdc123 4y agoAre rates for investment companies also affected by this? Like if a company wants to buy 30-50 houses to rent out, do they borrow at a similar rate?
- curiousllama 4y ago> Are rates for investment companies also affected by this? Yes > Like if a company wants to buy 30-50 houses to rent out, do they borrow at a similar rate? [... to regular mortgage borrowers] Typically no
- JamesBarney 4y agoAnd to expand on that, they usually borrow at a much higher rate than regular mortgage borrows.
- bombcar 4y agoAlmost all interest rates are affected by this, because almost all of them are "federal rate + X" - so if the fed rate floats up, so does the amount this company would pay.
- uptownfunk 4y agoI wonder what behavioral effects will be as a result of this. I’ve definitely become more conscious of eating out to cut cost. I hear Americans want to travel after being muzzled for 2 years. I am looking for more economic places to live versus cushy Palo Alto. I think until houses adjust to where they’re supposed to be (a la pre 2020 projected growth rates) vs the spike from pandemic Will be difficult for me to pull the trigger and buy a house
- paulpauper 4y ago10 year treasury bonds looking good or corporate bonds. You are locking in a 3-4% rate for the next decade. It will not take much to force interest rates and inflation back down again...another pandemic, recession, crisis, etc. Yes, 10-year bonds have a negative real yield now, but it seems unlikely inflation will stay at 5-8%/year for the next decade. The problem with cash is the ONLY way you are getting that 3% yield is if: 1. you stay in cash for a whole year , 2. and the fed does not lower rates again This is why bond ETFs have so much lag and are not as good. They still have old bonds on their book which pay worse, so you are getting maybe a 2% yield instead of 3%. You are better off just buying bonds from the treasury and getting the full amount.
- abm53 4y agoThe “old bonds on their book” will decline in value if rates rise. Consequently the ETF will be cheaper by exactly the right amount to keep the income/coupon component of its return in line with buying an equivalent basket of US treasury bonds directly.
- DoingIsLearning 4y ago> 10 year treasury bonds looking good or corporate bonds. You are locking in a 3-4% rate for the next decade. I don't follow, inflation is way higher than 3-4% all over the globe. How are bonds looking good? Do you mean going for bonds as a safe option that will lose less than cash?
- maerF0x0 4y agoAnyone else notice Powell mentioned multiple times that they're trying to weaken the labor market? (and by extension the ability of workers to negotiate good wages, good conditions) Anyone know why?
- majormunky 4y agoWorkers making good wages increases demand on goods that are already in high demand.
- maerF0x0 4y ago> Workers making good wages Wouldn't that be a baseline value of a society? It makes me think that the price increases that are happening is simply a return to norms after we had like 50yrs of productivity increases w/o increasing wages -- meaning prices were actually suppressed.
- stjohnswarts 4y agoI don't think that's the way it works in capitalism, unless it's part of the government's goals. Right now it isn't. The goal is to stop inflation, not make your or my life better. That was never the role of the Fed, that is for the legislature to decide with policy
- jazzkingrt 4y agoOne reason is that inflation has a lot of inertia, because inflationary expectations drive more inflation. A strong labor market drives up wages. When not matched by GDP growth, those wages increase costs, which cause workers to demand higher wages to keep up with those costs, and so on. The cycle needs to be broken even if there is short term pain for workers.
- maerF0x0 4y agoBut what about the decades of wages not keeping up with productivity (proxy for GDP Growth)? Could this simply be seen as workers finally getting their due?
- spaceman_2020 4y agoThird straight hike and core CPI is going up at more than half a percentage point monthly. CPI numbers, as reported, are very misleading. Nominally, it looks like its slowing down or plateauing (from 9% to 8.5%), but that's because the headlines always report the YoY number. The base effect is going to skew this towards a "inflation slowing down" narrative anyway. The MoM figures are far more relevant and they're not looking good at all, especially since its now moving towards the sticky kind of inflation (services, rent).
- alecco 4y ago@dang How is this entry about to leave the front page at 105 points and 154 comments and the CNBC one at 36 p 14 c rising? This is ridiculous. I'm not accusing of malice, but something needs fixing.
- leotravis10 4y agoKen Klippenstein's great report over at The Intercept that even the Fed’s own research warns that continuous interest rate increases could trigger a “deep recession”. https://theintercept.com/2022/09/09/recession-federal-reserve-inflation-interest-rate-hikes/ https://theintercept.com/2022/09/09/recession-federal-reserv... I can predict that next time around the Fed is going to trigger a full 100 percentage rate increase thus triggering a much deeper recession thus more layoffs and job losses as a result. It's by design really since even the Fed wants to get wages down and shift power back to the employer. Buckle up.