4 ms·

Why would the Board of Governors at the Federal Reserve care about corporate shareholders? Their main constituency is the banks, especially those that sit on th

by nickff 4y ago

Why would the Board of Governors at the Federal Reserve care about corporate shareholders? Their main constituency is the banks, especially those that sit on the boards of the regional Feds. Those banks benefited from quantitative easing, and similar policies, as it allowed them to originate a lot of loans and make a lot of money. Raising interest rates is very bad for investment banks. That said, I don't think there is any sort of complex plan. They're not as clever as you give them credit for, and it seems like things have spiraled out of control.

taylodl 4y ago
If that's the case then the Board of Governors would want to preserve their constituent banks and keep interest rates at current levels and not raise them, right? If they were to do that would they be doing the right thing?
- nickff 4y ago
  If they really cared about their constituent banks, they wouldn't have raised interest rates at all. This all depends on how seriously you think they take the inflation mandate, versus how much they care about their constituent banks and other political pressures. I happen to think that they really do care about inflation, as they know it is what will matter in the history books. I think that the Governors underestimated the long-term impact of extremely low rates, and how they would magnify the impact of increased rates on (commercial and investment) bank balance sheets. They love historical analogies, and there isn't one for this (yet).
  - taylodl 4y ago
    I agree. I suspect we're still tiptoeing around the 2008 crises and looking for that soft landing. There's is a balancing act for sure!
  - MuffinFlavored 4y ago
    > they wouldn't have raised interest rates at all. would that have lead to a death spiral of hyperinflation (if they didn't try to destroy demand/suck liquidity out of the financial system)
    - nickff 4y ago
      Maybe, but probably not hyper-inflation. Sustained, elevated inflation would be more likely.
      - ThunderSizzle 4y ago
        Sustained 10% year over year inflation is hyper inflation, which was a real possibility without any serious interest rate hikes and no change in fiscal policy from Congress.
        lamontcg 4y ago
        hyperinflation is generally defined as over a 50% monthly inflation rate or more than a 12974.63% yearly inflation rate.
MuffinFlavored 4y ago
> Why would the Board of Governors at the Federal Reserve care about corporate shareholders? > According to a 2020 Gallup poll, 55% of Americans reported owning stocks, either through individual stock purchases, mutual funds, or retirement accounts. This is down slightly from the high of 65% in 2007, but still represents a majority of the population. The population has a portion of their retirement portfolios exposed to U.S. equities? > When a company's stock price is down, executives may face pressure from shareholders to improve performance, which can lead to cost-cutting measures such as layoffs or reduced compensation for employees. Additionally, if the stock market is not healthy (aka down), corporate executives probably aren't giving employees bonuses/raises and probably aren't going on a hiring spree. aka, if the stock is down, more unemployment, more wages not keeping up with inflation

by nickff 4y ago

taylodl 4y ago

If that's the case then the Board of Governors would want to preserve their constituent banks and keep interest rates at current levels and not raise them, right? If they were to do that would they be doing the right thing?

nickff 4y ago
If they really cared about their constituent banks, they wouldn't have raised interest rates at all. This all depends on how seriously you think they take the inflation mandate, versus how much they care about their constituent banks and other political pressures. I happen to think that they really do care about inflation, as they know it is what will matter in the history books. I think that the Governors underestimated the long-term impact of extremely low rates, and how they would magnify the impact of increased rates on (commercial and investment) bank balance sheets. They love historical analogies, and there isn't one for this (yet).
- taylodl 4y ago
  I agree. I suspect we're still tiptoeing around the 2008 crises and looking for that soft landing. There's is a balancing act for sure!
- MuffinFlavored 4y ago
  > they wouldn't have raised interest rates at all. would that have lead to a death spiral of hyperinflation (if they didn't try to destroy demand/suck liquidity out of the financial system)
  - nickff 4y ago
    Maybe, but probably not hyper-inflation. Sustained, elevated inflation would be more likely.
    - ThunderSizzle 4y ago
      Sustained 10% year over year inflation is hyper inflation, which was a real possibility without any serious interest rate hikes and no change in fiscal policy from Congress.
      - lamontcg 4y ago
        hyperinflation is generally defined as over a 50% monthly inflation rate or more than a 12974.63% yearly inflation rate.

MuffinFlavored 4y ago

> Why would the Board of Governors at the Federal Reserve care about corporate shareholders? > According to a 2020 Gallup poll, 55% of Americans reported owning stocks, either through individual stock purchases, mutual funds, or retirement accounts. This is down slightly from the high of 65% in 2007, but still represents a majority of the population. The population has a portion of their retirement portfolios exposed to U.S. equities? > When a company's stock price is down, executives may face pressure from shareholders to improve performance, which can lead to cost-cutting measures such as layoffs or reduced compensation for employees. Additionally, if the stock market is not healthy (aka down), corporate executives probably aren't giving employees bonuses/raises and probably aren't going on a hiring spree. aka, if the stock is down, more unemployment, more wages not keeping up with inflation