Fed raises FFR [Federal Funds Rate] 0.25% as expected

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bobcat2
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Re: Fed raises FFR 0.25% as expected

Post by bobcat2 » Wed Dec 16, 2015 11:31 pm

nisiprius wrote:Do I understand Summers to be saying that interest rates are now so low that the Fed can't goose the economy out of a recession by lowering rates, therefore they can't risk anything that might cause a recession, therefore they must not ever raise rates? Once interest rates are lowered close to zero they cannot ever safely be raised? Sounds a little like Zeno's theory that an arrow in flight cannot actually move, because at any instant it is always in one specific place...
No, Larry Summers is not saying that. Here's Summers giving his views and what the Fed should have done and what it should be doing going forward.
http://larrysummers.com/2015/12/15/what ... have-done/

Here are his concluding remarks.
On balance the risks of raising rates seem a little more likely to play out and much more serious than the risks of standing still on rates. Moreover, given the inevitability of mistakes prudence dictates tilting towards making errors that are reversible. An excessive delay in raising rates can be remedied eight weeks later at the next FOMC meeting by raising them then. On the other hand, if rates are raised and it proves to be a mistake there are likely to be substantial costs as inflation expectations move down, financial turbulence ensues, and the economy possibly tips towards recession. Reversing the rate increase would be unlikely to eliminate these consequences. Moreover, reversing the direction of policy would hardly be helpful for central bank credibility as the central banks around the world who raised rates and then were forced to reverse themselves have discovered.

Reasonable people can come to different judgements on all of this. I think on balance it was a mistake to lock in a December rate increase though the argument is closer than it was in September. But that decision has been made. I hope the Fed will not now invest its credibility in signaling further increases until and unless there is much clearer evidence of accelerating inflation. I hope it will also emphasize the two sided character of the 2 percent inflation target to mitigate the risk that markets will think the US has an inflation ceiling rather than target. Finally, I hope the Fed will signal its awareness of instability and risk of growing problems in emerging markets.
BobK
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Re: Fed raises FFR [Federal Funds Rate] 0.25% as expected

Post by ccieemeritus » Wed Dec 16, 2015 11:47 pm

In theory, when interest rates rise, bond prices drop. The longer the term of the bond, the larger the drop in price of existing bonds.

Efficient market theory says that prices change in advance of "expected information".

So the "expected rate rise" on 12/16 should have resulted in price adjustments prior to 12/16.

I thought I'd look up today's change in the bond prices (using ETFs) as well as the YTD changes:

BND Vanguard total bond market -0.11% Today, +0.34%YTD
VGLT Vanguard long-term government bond -0.04% Today, -1.12% YTD
VGIT Vanguard intermediate-term government bond -0.09% Today, +1.32% YTD
VGSH Vanguard short term government bond -0.10% Today, +0.39% YTD

VCLT Vanguard long-term corporate bond +0.11% Today, -4.35% YTD
VCIT Vanguard intermediate-term corporate bond -0.02% Today, +0.53% YTD
VCSH Vanguard Short-term corporate bond -0.08 Today, +0.90% YTD

As a 100% stock guy, I'm shocked by those (near-zero) changes. Other than the long-term corporate bond YTD figure, the percentage changes are insignificant. This is despite the first interest rate hike in 9 years today. Meanwhile my stock index funds have been bouncing around +/-1% per day.

In related news, the WSJ reports that the majority of decline in high yield corporate bond prices is specific to energy companies (which are impacted by low prices for energy). (link probably requires subscription) http://www.wsj.com/articles/u-s-junk-bo ... 1450193889

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Re: Fed raises FFR 0.25% as expected

Post by patrick013 » Wed Dec 16, 2015 11:54 pm

bobcat2 wrote:On the other hand, if rates are raised and it proves to be a mistake there are likely to be substantial costs as inflation expectations move down, financial turbulence ensues, and the economy possibly tips towards recession. Reversing the rate increase would be unlikely to eliminate these consequences.
Guess what I call that. Raising rates up and down or at all.

"pretending to accomplishment"

I don't know. Maybe we all need new jobs. :)
age in bonds, buy-and-hold, 10 year business cycle

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Re: Fed raises FFR 0.25% as expected

Post by jimkinny » Thu Dec 17, 2015 8:14 am

nisiprius wrote:
furwut wrote:I found this interview interesting from Marketplace.

What Larry Summers thinks about raising interest rates
Do I understand Summers to be saying that interest rates are now so low that the Fed can't goose the economy out of a recession by lowering rates, therefore they can't risk anything that might cause a recession, therefore they must not ever raise rates? Once interest rates are lowered close to zero they cannot ever safely be raised? Sounds a little like Zeno's theory that an arrow in flight cannot actually move, because at any instant it is always in one specific place...
i do not know about Zeno's arrow but if you want to understand his point about asymmetric risk and effective monetary policy at very low interest rates read some of his speeches, Bradford Delong's blog or Krugman's blog.

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nisiprius
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Re: Fed raises FFR 0.25% as expected

Post by nisiprius » Thu Dec 17, 2015 8:51 am

bobcat2 wrote:
nisiprius wrote:Do I understand Summers to be saying that interest rates are now so low that the Fed can't goose the economy out of a recession by lowering rates, therefore they can't risk anything that might cause a recession, therefore they must not ever raise rates? Once interest rates are lowered close to zero they cannot ever safely be raised? Sounds a little like Zeno's theory that an arrow in flight cannot actually move, because at any instant it is always in one specific place...
No, Larry Summers is not saying that. Here's Summers giving his views and what the Fed should have done and what it should be doing going forward.
http://larrysummers.com/2015/12/15/what ... have-done/

Here are his concluding remarks.
On balance the risks of raising rates seem a little more likely to play out and much more serious than the risks of standing still on rates. Moreover, given the inevitability of mistakes prudence dictates tilting towards making errors that are reversible. An excessive delay in raising rates can be remedied eight weeks later at the next FOMC meeting by raising them then. On the other hand, if rates are raised and it proves to be a mistake there are likely to be substantial costs as inflation expectations move down, financial turbulence ensues, and the economy possibly tips towards recession. Reversing the rate increase would be unlikely to eliminate these consequences. Moreover, reversing the direction of policy would hardly be helpful for central bank credibility as the central banks around the world who raised rates and then were forced to reverse themselves have discovered.

Reasonable people can come to different judgements on all of this. I think on balance it was a mistake to lock in a December rate increase though the argument is closer than it was in September. But that decision has been made. I hope the Fed will not now invest its credibility in signaling further increases until and unless there is much clearer evidence of accelerating inflation. I hope it will also emphasize the two sided character of the 2 percent inflation target to mitigate the risk that markets will think the US has an inflation ceiling rather than target. Finally, I hope the Fed will signal its awareness of instability and risk of growing problems in emerging markets.
BobK
Thanks. (I see no way to summarize that using any fewer words than Summers used... )
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Re: Fed raises FFR [Federal Funds Rate] 0.25% as expected

Post by Kevin M » Thu Dec 17, 2015 2:03 pm

darrellr wrote:In theory, when interest rates rise, bond prices drop. The longer the term of the bond, the larger the drop in price of existing bonds.
This is not theory, it is a mathematical fact, but only if by "interest rates" you mean the yields of the bonds in question. Bond price and yield are mathematically related; i.e., it is kind of like miles per gallon and gallons per mile; price and yield are two ways of expressing the exact same thing.

However, if by "interest rates" you mean the Federal Funds Rate, it is not a fact at all. Only very short-term bonds historically respond in lock step with the FFR; the longer the maturity of the bond, the less relevance the FFR on it's yield and price.
Efficient market theory says that prices change in advance of "expected information".
Correct, which is the likely reason that the yield on the 1-month Treasury increased to about 0.2% over the last 2-3 months, as I showed in the graph in this post up-thread. If you click on that graph, and expand the time period to 1 year, you'll see that that 1-month Treasury rate was between 0% and 0.05% (or not much more) until it decisively broke above 0.05% in late November.

By contrast, if you add the 10-year Treasury (DGS10) to that chart, you'll see that it's movement in the last couple of months doesn't appear at all special relative to it's movement over the last year. Yesterday the 10-year was 2.30%, but it has been as high as 2.50% during the last year.

Image
So the "expected rate rise" on 12/16 should have resulted in price adjustments prior to 12/16.
Only for the shortest-term bonds.
I thought I'd look up today's change in the bond prices (using ETFs) as well as the YTD changes:
<snip>
As a 100% stock guy, I'm shocked by those (near-zero) changes. Other than the long-term corporate bond YTD figure, the percentage changes are insignificant. This is despite the first interest rate hike in 9 years today.
Hopefully explanations above, basically repeating and expanding on info in previous posts, clarify for you. There is no reason for shock, surprise, or even a slightly-raised eyebrow.

Kevin
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Re: Fed raises FFR [Federal Funds Rate] 0.25% as expected

Post by Kevin M » Thu Dec 17, 2015 2:10 pm

In terms of expectations for impact on savings products, here are Ken Tumin's thoughts from his recent blog post, Finally, a Fed Rate Hike! What Savers Should Expect, on DepositAccounts.com:
Now that the federal funds rate has finally increased, how will banks respond? And how will they respond next year after additional rate hikes? On average, banks may be slow to respond. First, it has been reported that banks don’t have a strong need for deposits. As the economy improves and loan demand increases, that should change. Second, banks may focus more on restoring their interest rate margins than attracting deposits. Low rates have hurt banks by shrinking margins between their deposit rates and their loan rates. Thus, most banks won’t be in a rush to raise their deposit rates.

Even though most banks may be slow to respond to the Fed rate hike, I think it’s likely we’ll see significant rate hikes in the next month at a few banks and credit unions. Internet banks should be the first to respond. They’re the ones that are impacted the most by interest rate competition. If you want to quickly benefit from the Fed rate hike, you may have to move your money to the few banks and credit unions that are following the Fed.
I saw news reports that several banks have increased borrowing rates but not deposit rates, which supports Ken's thoughts in the first paragraph of the quote. The second paragraph is just his opinion of course, but since he's probably morel looped in to deposit accounts than most of us, I give his opinion some weight, and will be keeping an eye open for better deposit account rates.

Kevin
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Re: Fed raises FFR [Federal Funds Rate] 0.25% as expected

Post by nisiprius » Thu Dec 17, 2015 2:47 pm

Kevin M wrote:...I saw news reports that several banks have increased borrowing rates but not deposit rates, which supports Ken's thoughts in the first paragraph of the quote...
Oh, what a surprise. <--- Irony.

I was actually going to make a data-free snarky post to the effect that my experience has always been that when interest rates rise, bank loan rates rise immediately but deposit rates rise slowly, but when interest rates fall, bank deposit rates fall immediately but loan rates fall slowly. Now that you've supplied the data that this is in fact really happening, I decided to make the snarky post. (In fact I just did).

(In fact the rate on my credit card was 9.95% for darn near a decade, and in the general time frame when the Fed rate fell, my credit card rate rose in fits and starts to 14.90%. (Since we pay off our monthly balance and don't incur finance charges, I didn't do anything about it).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Fed raises FFR [Federal Funds Rate] 0.25% as expected

Post by Angst » Thu Dec 17, 2015 3:25 pm

Kevin M wrote:
Ken Tumin wrote:<snip>... If you want to quickly benefit from the Fed rate hike, you may have to move your money to the few banks and credit unions that are following the Fed.
I saw news reports that several banks have increased borrowing rates but not deposit rates, which supports Ken's thoughts in the first paragraph of the quote. The second paragraph is just his opinion of course, but since he's probably more looped in to deposit accounts than most of us, I give his opinion some weight, and will be keeping an eye open for better deposit account rates.

Kevin
This makes sense to me, moreover, I suspect it would be good to pounce quickly on these opportunities as I have the notion that the effects of the rate hike will not only be small but perhaps not long-lasting. I understand how the Fed has rationalized the rate change, and it may well be the right thing to do, but because it's not clear to me that our economy needs it nor that our economy won't primarily be affected by the prevailing global economic/rates malaise, I look forward to the debate when perhaps 6 months out the Fed considers another bump in rates. I find it fascinating to follow and to think about. Thankyou for your posts Kevin.

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Re: Federal Reserve raises interest rates

Post by Leif » Thu Dec 17, 2015 5:29 pm

Taylor Larimore wrote:
Google "Federal Reserve Rate Increase 2015" and it will come-up with over 30,000,000 hits.

Best wishes.
Taylor
When I typed "Federal Reserve Rate Increase 2015" (with quotes) into google I got 10 hits. If you don't use quotes you get a hit on everything that has the word "Federal" and all that have the word "Reserve" and all the have the word "Rate", etc.

One of those 10 hits is this thread! Wow google indexes fast!
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

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Lesson learned

Post by Taylor Larimore » Fri Dec 18, 2015 9:47 am

Leif:

Thank you for pointing out that my Google quest was nearly meaningless. Lesson learned.

Best wishes.
Taylor
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