What is the FED doing?

[sregit18]

What do you mean the US Treasury can't make money with low rates? That is the rate at which they borrow. If the Fed raised rates today the 10 year would go below 0% and invert. The Fed only buys at the short end, they are not buying 10 and 30 years so if the market felt inflation was going to be pervasive there is no forces holding longer maturities down.

The fact is global rates are very low. Go look at rates in Japan and Europe and you will see why it is a great deal for foreign investors to buy in at 1.1%.

The Fed's QE is not inflationary. Everyone said 10 years ago to go buy gold since QE will cause inflation and gold has basically gone nowhere since while inflation has been >2% . There is no correlation between CPI and bond buying. QE does not cause inflation because most of the money stays trapped in the banking system and does not get into the general economy. What causes and increase in inflation is fiscal spending via stimulus, that puts money directly in peoples pockets and they spend it quickly (go look up a chart of M2), hence inflation. You also have to judge the current inflation with the backdrop of a once in lifetime disruption to the supply side coupled with massive fiscal stimulus.

Agree with all except the bulk of the increase in the money supply is not stimulus. The FED had a giant hand in that through their bond repurchase plan and other tools. With the money supply up roughly 30% over the past 12+ months that was not just stimulus checks.

Inflation has been very concentrated thus far in its reach, but I do not believe it will settle down either once supply chain issues are settled. The money supply and inflation historically have held a direct correlation to one another. Not perfectly correlated, but scarily close.

 

[FloridaTigerFan]

Go watch the 50 min Frontline docuseries “The Power of the Fed” that was on PBS last week. Scary!

Unfortunately, 95%+ of our voting population has no clue about monetary policies, sovereign debt, interest rates, and central banks.

I hope everyone is ready for stagflation and poor economic growth the next 10-15 years. We are now Japan circa 1990. We have an aging population and our economy is 70%+ service/consumer spending, completely tethered to artificially low interest rates. We do not produce much, just consume, and grow GDP through issuing more cheap debt. The overall debt (personal, corporate, government) issue is a huge problem! The growth and amount of corporate debt scares the crap out of me. Removal of the 9 Trillion in extra liquidity the Fed has injected into the markets, either through taxes or other measures, will crush asset prices.

I have no confidence we can get out of this economic mess without going through a major recession/depression on the short term or significant inflation on the long term.

The media and Libs need to focus a lot more of the woke conversation and equity discussions on the Fed. Their direct policies have significantly worsen the wealth inequality issues.

I do blame the Fed for their policies. However, politicians are the ones to blame. Their inactions and actions have forced the Fed to take extreme measures.

 

[gardentiger]

Agree with all except the bulk of the increase in the money supply is not stimulus. The FED had a giant hand in that through their bond repurchase plan and other tools. With the money supply up roughly 30% over the past 12+ months that was not just stimulus checks.

Inflation has been very concentrated thus far in its reach, but I do not believe it will settle down either once supply chain issues are settled. The money supply and inflation historically have held a direct correlation to one another. Not perfectly correlated, but scarily close.

Increased money supply=inflation
Inflating the money supply
Rising prices are a result of inflating the currency.

 

[FloridaTigerFan]

Explain like I’m 5 why rates this low are not a good thing. Also what’s the correlation with rates and stock market? Does it boil down to simply consumers having more discretionary funds to throw into the stock market since they are able to get their debt at a lower rate?

Simple… too much of a good thing often has major consequences.

in a normal functioning free market, your returns (IRR/ROI) should be rewarded based on the risk. By driving the interest rates so low, this means everyone is taking on more risk than the returns on the investment should warrant.

Also, with super low interest rates, future cash flows are not discounted or valued, which inflates prices and creates bigger bubbles of speculative risky assets.

when the next black swan event happens, there will be little weapons to help kickstart the economy with near zero Fed funds rates and the 10 year US T bills at 1.3% or lower.

Now, junk bonds (high risk) are way to close to us treasuries (low risk). Wtf?!?

Way too many corporations are not growing, they are simply issuing more bonds and debt to buy back shares, which increase stock values. Some high growth companies are so far from ever being profitable and are simply growing market share through increased acquisition costs fueled by cheap debt.

 

[1Clemson]

Thank goodness for Paul Vocker

...

 

[FranktheDank]

Housing market headed for huge crash. Lumber crazy so builders just add cost to buyer. Lumber you could get for $6. Now is $40. When lumber goes down people will be 30-40 k upside down

Bank will laugh if they want to refi or second mortgage. Spec houses going for 225 are worth about 175. Might not be 2008 bad. But will be hurtful

Nah the demand for housing still greatly outweighs the supply and that is not changing anytime soon. Until the supply outweighs the demand there won't be a housing crash or anything close to it

 

[The Orange Wave]

Agree with all except the bulk of the increase in the money supply is not stimulus. The FED had a giant hand in that through their bond repurchase plan and other tools. With the money supply up roughly 30% over the past 12+ months that was not just stimulus checks.

Inflation has been very concentrated thus far in its reach, but I do not believe it will settle down either once supply chain issues are settled. The money supply and inflation historically have held a direct correlation to one another. Not perfectly correlated, but scarily close.

I agree completely on the correlation with inflation and money supply. I would disagree on the source of the increase in money supply (M2). The Fed has increased its balance sheet substantially since 2008 and 2019 with annual growth at +/- 6%. In 2020 it shot up 27% at its peak and is now slowing to 13.8%. The big difference between 2008-2019 and 2020 was the fiscal stimulus. I just have not seen any link between QE and CPI and/or M2.

 

[FloridaTigerFan]

Nah the demand for housing still greatly outweighs the supply and that is not changing anytime soon. Until the supply outweighs the demand there won't be a housing crash or anything close to it

Agree. With the aging baby boomers and somewhat of a lost younger generation on creating wealth, I don’t see how we avoid a crash down the road without significant inflation. Supply will catch up with demand, within a few years.

A home buyers budget will change greatly from 3% to 6% interest rates on a 30 year fixed mortgage. I see approx 40% more on monthly payments going from 3 to 6%.

 

[tallulahtiger30319]

To put it simply.....they are trying to thread the tiniest of needles. Get the economy back to pre-covid growth rates while keeping inflation transitory. For those concerned with increased national debt, just imagine how bad it will be in relation if the GDP were to slow to a crawl. I'm just glad there are people in those rooms a LOT smarter than me.

are there though?

 

[kgwillison]

same with my parents ..... good ole Carter years

I got my first home at a 'teaser rate' of 13.25%. Prime loan. 1982. Those were the days. Not Carter's fault. Not Reagan's fault. OPEC was constricting the oil supply and prices were soaring. Many here might be too young to remember Jerry Ford's (non) winning slogan "WIN: Whip Inflation Now" (and I liked Jerry Ford and he got my vote).

The Fed is not yet convinced the economy is strong enough to withstand higher rates. Inflation, the governors believe, is transitory right now. They expect it will trend downward soon. Inflation should be good news because it will show that wages are rising and that the economy is strong. But Republicans are already putting out ads tying Biden to inflation and blaming him for it.

Politics. Good thing it is my job to manage political affairs for my employer or I would hate it. Sorry, gotta run: have a political fundraiser to attend this evening to re-elect a sitting US Senator.

 

[kgwillison]

Nah the demand for housing still greatly outweighs the supply and that is not changing anytime soon. Until the supply outweighs the demand there won't be a housing crash or anything close to it

Thank you. These "the sky is falling" folks speaking about the housing market are not fully informed about how prices work when you have supply and demand curves. Supply is low (and will be for years in places people want to live) while demand is high. Sure, you can point to weak housing markets like Toledo or Detroit where there are plenty of vacancies because few people really want to live there. But if you look at thriving metro, suburban and exurban areas, demand is well ahead of supply. Even rents in places like NYC and SF, where there was an outflow of population due to the pandemic, are stabilizing. Simply put, there are too few places for people in boom towns to live.

 

[gcsoccer16]

Inflation is rampant yet they refuse to raise rates. This morning I checked the US 10 year treasury rate and it's down to 1.1%. Both parties are guilty btw. How can anyone say the economy is healthy with rates like that? Institutions can't make money on that. The US treasury can't make money on that. Since 2008, spanning 3 different presidents, it's been steadily declining with some peaks and valleys.

Using rates to keep hitting record highs in the stock market is idiotic.
All it does is increase inflationary spending.
What happens when it gets to zero or negative which we appear to be on pace for in the 3-5 years using a linear trendline?

I'm not saying they need to knee jerk it up quickly but they should have been slowly raising it 1/10 of a point every month since the vaccines came out.

I'm just trying to understand the FED's long term strategy here because rates this low are not a good a thing.

Its how our government plans to get around the debt crisis. Print money and keep rates low so we can screw china and the debt we owe them. If you can create enough inflation the debt we have to service isnt nearly as bad

 

[FLOtiger93]

Nah the demand for housing still greatly outweighs the supply and that is not changing anytime soon. Until the supply outweighs the demand there won't be a housing crash or anything close to it

This and the credit requirements at this time are far more stringent than those that were the catalyst for the ‘08 recession. There is more demand out there, it’s hard to buy a home with anything below 640 right now.

 

[Orangetown]

Bought my first home at 9%. When I signed the contract, it was 8%. Two weeks later and before the closing, the OPEC oil crisis pushed it up a point at closing. I bought my next house 10 years later and the rate was 10.5%.

What is amazing is the politics. Eight months ago, the GOP president was calling for lower interest rates to boost the economy and his re-election. Now with a Dem as President the Conservatives of this are calling for higher rates. Thank God for the limited independence of the Fed to protect them from Republicans and Democrats.

 

[Jwilliamsiii]

Ha. I remember my grandad had a 10 year cd locked in at 10%

 

[yamatoby2375]

My parents tell me about when they financed a house at 18%

And this is the issue. The parents of the youngest folks buying homes either weren’t able to buy a home at those absurd rates of the early 80s or didn’t teach their spoiled ass entitled kids about it. Either way, the folks under 30 buying homes and balking at 6% are extremely misinformed about history.

 

[CoffeeIsForClosers]

I got my first home at a 'teaser rate' of 13.25%. Prime loan. 1982. Those were the days. Not Carter's fault. Not Reagan's fault. OPEC was constricting the oil supply and prices were soaring. Many here might be too young to remember Jerry Ford's (non) winning slogan "WIN: Whip Inflation Now" (and I liked Jerry Ford and he got my vote).

The Fed is not yet convinced the economy is strong enough to withstand higher rates. Inflation, the governors believe, is transitory right now. They expect it will trend downward soon. Inflation should be good news because it will show that wages are rising and that the economy is strong. But Republicans are already putting out ads tying Biden to inflation and blaming him for it.

Politics. Good thing it is my job to manage political affairs for my employer or I would hate it. Sorry, gotta run: have a political fundraiser to attend this evening to re-elect a sitting US Senator.

Well said

 

[sregit18]

I agree completely on the correlation with inflation and money supply. I would disagree on the source of the increase in money supply (M2). The Fed has increased its balance sheet substantially since 2008 and 2019 with annual growth at +/- 6%. In 2020 it shot up 27% at its peak and is now slowing to 13.8%. The big difference between 2008-2019 and 2020 was the fiscal stimulus. I just have not seen any link between QE and CPI and/or M2.

I would say the big difference being the banks are actually able to deploy the money supplied which was not happening 2009-2011.

 

[CoffeeIsForClosers]

Bought my first home at 9%. When I signed the contract, it was 8%. Two weeks later and before the closing, the OPEC oil crisis pushed it up a point at closing. I bought my next house 10 years later and the rate was 10.5%.

What is amazing is the politics. Eight months ago, the GOP president was calling for lower interest rates to boost the economy and his re-election. Now with a Dem as President the Conservatives of this are calling for higher rates. Thank God for the limited independence of the Fed to protect them from Republicans and Democrats.

And let us not forget who appointed Powell. He may be my favorite fed governor so far. Starchily independent under huge amounts of political pressure during one of the toughest economic periods in our history and doesn’t even flinch.

 

[tigerGUY]

You mean the federal reserve.

You're correct.

 

[Jokes On You]

I know nothing about monetary policy, but I can say that any rising rate is going to shock the economy. We've had low rates for so long that its engrained in the mindset of consumers. Its crack at this point. Is there a financial Methadone to wean folks into a more reasonable rate?

Our neighbor's daughter just bought her first house. Its a modest house that most folks would agree is a smart first home purchase. She was SHOCKED that our first mortgage was a whopping 6% (and change). Her exact quote was that she would be renting at that rate. What would taking out a whole generation of consumers do to the housing market or any "credit" related purchase?

It would correct inflated home prices and she would be able to afford the house at the lower price, IMO

 

[bp1999]

I think that conflating one being conservative with being a Trump supporter leads to errant conclusions. Trump's calls for 0% interest rates were self-serving and had no basis in conservative fiscal policy.

 

[gardentiger]

You're correct.

I mixed them up earlier as well. Which is ironic because they do not work independent of one another anymore...at least since the Bush crime family.

 

[bobpins2]

same with my parents ..... good ole Carter years

Yes I remember those good ole years. I got 15.25% and was happy to get that.

 

[PAWrocka]

I think that conflating one being conservative with being a Trump supporter leads to errant conclusions. Trump's calls for 0% interest rates were self-serving and had no basis in conservative fiscal policy.

<------- moderate conservative, registered Republican, in no way a Trump supporter

 

[SCGA404]

Explain like I’m 5 why rates this low are not a good thing. Also what’s the correlation with rates and stock market? Does it boil down to simply consumers having more discretionary funds to throw into the stock market since they are able to get their debt at a lower rate?

There isn’t a reason why a ranch style house in Atlanta built in the 80’s and is a 3/2 should sell for $650k but they are. It’s absolutely inflated. That’s why rates being at all time lows are bad IMO.

 

[scotchtiger]

There isn’t a reason why a ranch style house in Atlanta built in the 80’s and is a 3/2 should sell for $650k but they are. It’s absolutely inflated. That’s why rates being at all time lows are bad IMO.

Ranch style 3/2s in Mt. Pleasant are being bought for $700K+, bulldozed, and replaced with $2M+ houses if it makes you feel better about ATL.

 

[millertime2121]

Ranch style 3/2s in Mt. Pleasant are being bought for $700K+, bulldozed, and replaced with $2M+ houses if it makes you feel better about ATL.

Very similar things happening in certain parts of Atlanta.

 

[TigerRagCU]

I agree completely on the correlation with inflation and money supply. I would disagree on the source of the increase in money supply (M2). The Fed has increased its balance sheet substantially since 2008 and 2019 with annual growth at +/- 6%. In 2020 it shot up 27% at its peak and is now slowing to 13.8%. The big difference between 2008-2019 and 2020 was the fiscal stimulus. I just have not seen any link between QE and CPI and/or M2.

Can’t forget about velocity which is now at all time lows. Can’t have sustained inflation w/o it. Lending and credit growth turned negative. CPI has or will likely peak in the next few months.