Interest rates and Economy

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bugleheadd
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Joined: Fri Nov 29, 2019 11:25 am

Interest rates and Economy

Post by bugleheadd » Wed Feb 12, 2020 10:19 am

I am by no means an expert on finance and the economy.

but it seems to me that the Fed is hesitant to raise interest rates and want to maintain low int rates; is this to prevent markets from crashing? were increasing interest rates the cause of 2018 market drop? is my understanding wrong?

if the economy is stronger than ever before, why cant interest rates go back up slowly? are we in for big problems i nthe future?

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fishandgolf
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Re: Interest rates and Economy

Post by fishandgolf » Wed Feb 12, 2020 10:24 am

Interest rates are usually raised to thwart off rising inflation. Current rate of inflation is at or below the Fed's target rate of 2%......and has been for along time. Prediction is inflation will remain subdued for another year or longer....

csmath
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Re: Interest rates and Economy

Post by csmath » Wed Feb 12, 2020 10:25 am

Image

Source: https://www.visualcapitalist.com/700-ye ... rest-rates

I'm not sure what happens next but "downward" doesn't look like a new trend.

acegolfer
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Re: Interest rates and Economy

Post by acegolfer » Wed Feb 12, 2020 10:27 am

bugleheadd wrote:
Wed Feb 12, 2020 10:19 am
I am by no means an expert on finance and the economy.

but it seems to me that the Fed is hesitant to raise interest rates and want to maintain low int rates; is this to prevent markets from crashing? were increasing interest rates the cause of 2018 market drop? is my understanding wrong?

if the economy is stronger than ever before, why cant interest rates go back up slowly? are we in for big problems i nthe future?
Fed will increase rate, if there's a threat of inflation. Since there's none at the moment, it won't increase.

Next, should Fed increase now so that they have more room to lower, when the recession hits? That's a debatable question and economists have different opinions on this.

DB2
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Re: Interest rates and Economy

Post by DB2 » Wed Feb 12, 2020 10:37 am

bugleheadd wrote:
Wed Feb 12, 2020 10:19 am
I am by no means an expert on finance and the economy.

but it seems to me that the Fed is hesitant to raise interest rates and want to maintain low int rates; is this to prevent markets from crashing? were increasing interest rates the cause of 2018 market drop? is my understanding wrong?

if the economy is stronger than ever before, why cant interest rates go back up slowly? are we in for big problems i nthe future?
You saw what happened in 2018 when they raised rates.

No, as of today, the economy cannot handle higher rates. In fact, the market is pretty much already expecting another rate cut this year.

You have to keep in mind debt levels at all levels (corporate, student, credit, auto, govt, etc.) are very high. Higher rates would not be good.

adamthesmythe
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Re: Interest rates and Economy

Post by adamthesmythe » Wed Feb 12, 2020 10:37 am

Even a brief Google search turns up links citing any number of Fed "mandates" ranging from two to five and maybe up.

But. I think it is generally accepted that low inflation and moderate economic growth are primary concerns. As far as I know, strength of the "market" is not a primary concern, although it may result from addressing the first two.

It appears that there is a new factor of political interference that the Fed is, at least so far, strongly resisting.

corysold
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Re: Interest rates and Economy

Post by corysold » Wed Feb 12, 2020 10:42 am

Somewhat related, is there a lower limit to what rates could go to? Could you in theory have -15% rates for example?

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Ramjet
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Re: Interest rates and Economy

Post by Ramjet » Wed Feb 12, 2020 10:46 am

Lots of factors keeping rates low:

Demographics
Globalization
Technology
Gov. debt

Topic Author
bugleheadd
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Joined: Fri Nov 29, 2019 11:25 am

Re: Interest rates and Economy

Post by bugleheadd » Wed Feb 12, 2020 10:54 am

how does keeping rates flat or lower affect the total bond market? it means bond prices stay flat or go up, while dividends get cut? so holding BND would be safe in that it will have more upside than downside , in terms of price?

and if we get to negative int rates? does that mean a "high yield" savings accounts will not pay any interst, but customers will have ot pay interest to keep their money i nthere?

alluringreality
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Re: Interest rates and Economy

Post by alluringreality » Wed Feb 12, 2020 11:18 am

corysold wrote:
Wed Feb 12, 2020 10:42 am
Could you in theory have -15% rates for example?
There's no reason for this to only be a theory. I'm willing to accept people lending money to me at -15% rates right now! On the other hand, I don't intend to accept being a lender for rates less than zero. Basically I figure as rates begin going below zero there tends to be some financial incentive for a company to begin a business of simply holding assets at the cheapest price possible, so personally I don't think rates considerably below zero are likely to be very reasonable.

Robot Monster
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Re: Interest rates and Economy

Post by Robot Monster » Wed Feb 12, 2020 12:05 pm

A big reason the Fed is resistant to raise interest rates is because of the threat of low inflation. "Inflation that runs persistently below our objective can lead to an unhealthy dynamic in which longer-term inflation expectations drift down, pulling actual inflation even lower,” said Fed Chairman Jerome Powell.

An extended period of nearly flat prices is the essence of the “Japanification” specter that worries the U.S. and Europe.

I'm quoting from the article,
What the Fed Fears: People Who Can’t Remember Rising Prices
https://www.wsj.com/articles/japan-offe ... 1578837600

DB2
Posts: 613
Joined: Thu Jan 17, 2019 10:07 pm

Re: Interest rates and Economy

Post by DB2 » Wed Feb 12, 2020 12:56 pm

Robot Monster wrote:
Wed Feb 12, 2020 12:05 pm
A big reason the Fed is resistant to raise interest rates is because of the threat of low inflation. "Inflation that runs persistently below our objective can lead to an unhealthy dynamic in which longer-term inflation expectations drift down, pulling actual inflation even lower,” said Fed Chairman Jerome Powell.

An extended period of nearly flat prices is the essence of the “Japanification” specter that worries the U.S. and Europe.

I'm quoting from the article,
What the Fed Fears: People Who Can’t Remember Rising Prices
https://www.wsj.com/articles/japan-offe ... 1578837600
I always thought falling prices over time were a good thing for a consumer, but what do I know. Why do I want to pay more for something as a consumer if I don't have to? And why does it have to be 2% per the Fed?

boglerdude
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Joined: Fri Jul 10, 2015 1:28 am

Re: Interest rates and Economy

Post by boglerdude » Thu Feb 13, 2020 1:26 am

> I always thought falling prices over time were a good thing

If prices fall, wages need to fall. When folks see their nominal wages fall, they vote for a higher minimum wage. That pushes up all wages and forces layoffs.

YearTrader
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Joined: Thu Jan 02, 2020 6:46 am

Re: Interest rates and Economy

Post by YearTrader » Thu Feb 13, 2020 1:34 am

bugleheadd wrote:
Wed Feb 12, 2020 10:54 am
how does keeping rates flat or lower affect the total bond market? it means bond prices stay flat or go up, while dividends get cut? so holding BND would be safe in that it will have more upside than downside , in terms of price?
This type of expectation is already priced in.

Dottie57
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Location: Earth Northern Hemisphere

Re: Interest rates and Economy

Post by Dottie57 » Thu Feb 13, 2020 2:21 am

bugleheadd wrote:
Wed Feb 12, 2020 10:19 am
I am by no means an expert on finance and the economy.

but it seems to me that the Fed is hesitant to raise interest rates and want to maintain low int rates; is this to prevent markets from crashing? were increasing interest rates the cause of 2018 market drop? is my understanding wrong?

if the economy is stronger than ever before, why cant interest rates go back up slowly? are we in for big problems i nthe future?
I too believe the Fed should be helping to raise interest rates. When I was growing up my grandfather encouraged saving by “ saying make your money work for you”. Rates were 4% on a savings account. Businesses could still grow but had to pay a decent price to use money not their own. In many ways it is a transfer of money from one group to another.

I also want the Fed to have room to cut interest rates during a recession. Not sure what can be done when recession hits.

typical.investor
Posts: 1375
Joined: Mon Jun 11, 2018 3:17 am

Re: Interest rates and Economy

Post by typical.investor » Thu Feb 13, 2020 2:56 am

Dottie57 wrote:
Thu Feb 13, 2020 2:21 am
bugleheadd wrote:
Wed Feb 12, 2020 10:19 am
I am by no means an expert on finance and the economy.

but it seems to me that the Fed is hesitant to raise interest rates and want to maintain low int rates; is this to prevent markets from crashing? were increasing interest rates the cause of 2018 market drop? is my understanding wrong?

if the economy is stronger than ever before, why cant interest rates go back up slowly? are we in for big problems i nthe future?
I too believe the Fed should be helping to raise interest rates. When I was growing up my grandfather encouraged saving by “ saying make your money work for you”. Rates were 4% on a savings account. Businesses could still grow but had to pay a decent price to use money not their own. In many ways it is a transfer of money from one group to another.

I also want the Fed to have room to cut interest rates during a recession. Not sure what can be done when recession hits.
If the US raises rates, won’t we see foreign inflows into treasuries and other fixed income?

And what will a stronger dollar due to US economic competitiveness? It’ll make foreign goods cheaper and US goods more expensive. And if it slows the economy too much, yuck.

You can still make your investment work for you by investing. Your Grandfather’s era didn’t have globalization pulling inflation down or the same degree of aging societies doing the same.

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Interest rates and Economy

Post by Valuethinker » Thu Feb 13, 2020 3:27 am

DB2 wrote:
Wed Feb 12, 2020 12:56 pm
Robot Monster wrote:
Wed Feb 12, 2020 12:05 pm
A big reason the Fed is resistant to raise interest rates is because of the threat of low inflation. "Inflation that runs persistently below our objective can lead to an unhealthy dynamic in which longer-term inflation expectations drift down, pulling actual inflation even lower,” said Fed Chairman Jerome Powell.

An extended period of nearly flat prices is the essence of the “Japanification” specter that worries the U.S. and Europe.

I'm quoting from the article,
What the Fed Fears: People Who Can’t Remember Rising Prices
https://www.wsj.com/articles/japan-offe ... 1578837600
I always thought falling prices over time were a good thing for a consumer, but what do I know. Why do I want to pay more for something as a consumer if I don't have to? And why does it have to be 2% per the Fed?
That's called the Fallacy of Composition in macroeconomics. What's good for the individual household is not good for the economy as a whole. If we all cut back, then there is not enough demand to sustain the economy at its current level of activity.

Japan has this situation, and Eurozone teeters on the edge of it. If prices are going to fall next year, it's rational not to spend this year. All consumers cut back.

But no one spends, then who buys? Companies in turn cut back their operations, cut costs, cut prices. Thus a downward spiral. Since it's harder to cut employee wages, unemployment tends to rise (keep your existing workforce but don't hire new people) - or just close operations.

Perhaps if households would also accept a negative return on their investments this scenario can work. Otherwise you just get excess savings, with no one in the economy actually spending those savings.

DB2
Posts: 613
Joined: Thu Jan 17, 2019 10:07 pm

Re: Interest rates and Economy

Post by DB2 » Thu Feb 13, 2020 9:14 am

Valuethinker wrote:
Thu Feb 13, 2020 3:27 am
DB2 wrote:
Wed Feb 12, 2020 12:56 pm
Robot Monster wrote:
Wed Feb 12, 2020 12:05 pm
A big reason the Fed is resistant to raise interest rates is because of the threat of low inflation. "Inflation that runs persistently below our objective can lead to an unhealthy dynamic in which longer-term inflation expectations drift down, pulling actual inflation even lower,” said Fed Chairman Jerome Powell.

An extended period of nearly flat prices is the essence of the “Japanification” specter that worries the U.S. and Europe.

I'm quoting from the article,
What the Fed Fears: People Who Can’t Remember Rising Prices
https://www.wsj.com/articles/japan-offe ... 1578837600
I always thought falling prices over time were a good thing for a consumer, but what do I know. Why do I want to pay more for something as a consumer if I don't have to? And why does it have to be 2% per the Fed?
That's called the Fallacy of Composition in macroeconomics. What's good for the individual household is not good for the economy as a whole. If we all cut back, then there is not enough demand to sustain the economy at its current level of activity.

Japan has this situation, and Eurozone teeters on the edge of it. If prices are going to fall next year, it's rational not to spend this year. All consumers cut back.

But no one spends, then who buys? Companies in turn cut back their operations, cut costs, cut prices. Thus a downward spiral. Since it's harder to cut employee wages, unemployment tends to rise (keep your existing workforce but don't hire new people) - or just close operations.

Perhaps if households would also accept a negative return on their investments this scenario can work. Otherwise you just get excess savings, with no one in the economy actually spending those savings.
I agree there has to be spending, but lower prices on items also allows me to have the opportunity to buy other things (which helps other industries too). There is that fallacy of the brick going through the store owner's window. Some say that is good. But, it's not. That store owner has to spend money on something which could have been spent on something else. It' helps the glass repair place, but denies something/someone else who would have gotten that money.

I guess I was looking at it from the perspective of (as one example)....I bought a decent laptop a couple of years for $380. That same time of laptop would have cost double maybe 4-5 years earlier. So, an example of what I see as a good thing. The computer was cheaper to build and sell (apparently) and good for the consumer in terms of what I had to spend. If that same laptop would be $480 today (same features), maybe a bad thing. Again, just using a simplified example.

Cars as an example. My Honda Accord LX I bought new had a sticker in 2006 for $20,000. I was car shopping recently and and that same equivalent Accord LX model for 2020 has about a $24,000 sticker. It only went up $4000. Factoring in inflation (~2% a year since) and given how many more features, electronics, and safety the 2020 model has, the price went down all things considered for what you're getting. Another positive thing here vs if the price went up a lot more.

As far as savings, it really depends on what means. If money is "saved" by investing in the stock market, that is having a real benefit for companies, financial industries, etc. Sitting a bank savings account is still benefiting the banks, financial industries while hurting other sectors potentially. Either way, I think too many Americans lack savings. Isn't it like half the country only has something like $400 or less for an emergency? The average american has more debt which might be good for the short term in the economy, but long term has implications. It only makes the next downturn all the harder or the bigger the bubble, the bigger the burst. 2008 a great example. Huge boom/bubble for the mortgage companies with refis and shorter term boost for the economy after 9/11 until 2008. Then it became the worse crisis since the Great Depression.

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