FED: If the Fed has to exist, what do you think an ideal interest rate is?

[hugolp]

There is not single interest rate anyways. There are long term and short term rates. Shorter term rates may tend to follow rates set by the Fed (rates at which the banks can borrow from the Fed) and longer term rates tend to be based on Treasury note rates. Mortgages mostly follow ten year Treasury rates. Interest rates on Treasury notes are based on auctions and are set by supply and demand for the notes.

There are three basic components of an interest rate and expected rate of inflation is probably the biggest factor. If a lender expects a high rate of inflation during the time of the loan, they will demand a high interest rate to compensate them for this- giving them a real rate of return. The second component is their desired real rate of return and the third is a risk premium- the more likely a person is to pay back the loan, the lower the risk premium that gets added to the base rate. So let's try an example. Say the expected rate of inflation during the loan period is three percent. A lender will then start with three percent as the base for their rate. They want a half a percent real return on the loan so that gets added in. Now the rate is up to 3.5%. Say the borrow has a good credit history and is considered very reliable- now we add in one tenth of a percent so the final rate will be 3.6%.

Thus, there is not any single interest rate to set. Rates will vary depending on many factors- the length of the loan, the expected rate of inflation, a risk factor for the borrower, and the desired real rate of return the lender wants.

Correct, but he is talking about the Fed its pretty obvious that he is refering to the rates the Fed sets.

 

[Zippyjuan]

Which still leaves the question- how does one know if rates are too high or too low? Too high or too low for what? What should the proper rate be for banks to borrow money from the Fed?

Let us consider the factors I listed previously. First, inflation is very low- and the loans are overnight- not much inflation going to happen over night. . That means that rates should be expected to be low. Are the banks at high risk of not paying back the loans from the Fed (they are required to put up collateral)? I would say most are low risk meaning a low risk premium added to the base rate. The third factor then is lender premium- the Fed is not concerned about profits- though they do earn them and (after costs), turns their profits over to the Treasury anyways. All this would suggest that low rates for now are apropriate. If inflation rises, then the rate should also be raised.

 

[Brian4Liberty]

You are talking about the rate of monetary inflation. He is talking about the interest rates the Fed sets. They are different things.

Yep.

For a middle ground, the Fed and Treasury should ensure a monetary inflation rate as close to zero as possible (Milton's computer program). Nothing else.

Interest rates should be set by open, transparent and competitive markets.

Of course then you really don't need a Federal Reserve.

 

[hugolp]

Which still leaves the question- how does one know if rates are too high or too low? Too high or too low for what? What should the proper rate be for banks to borrow money from the Fed?

Price controls dont work. You can not set prices, including the price of money. Acala has said it at the beginning of the thread:

It is not possible to set prices by fiat. Period. This was the great achievement of von Mises' book "Socialism". You cannot, the Fed cannot, the government cannot set ANY prices including interest rates because it is not possible for any person or think tank to possess the information needed. The information needed is a vast, dynamic aggregate of vast, dynamic aggregates of dynamic subjective valuations of goods, services, and dynamic individual circumstances. Only in a free market with free pricing can the necessary information needed to "set" interest rates be gathered and evaluated.

The idea that you, or anyone else, can pull an interest rate out of a hat demonstrates a complete lack of understanding of the way prices work and the market meaning of interest rates.

 

[noxagol]

Of course, it would be best if we went to free banking and if the government only collected in gold.

Unfortunately the Fed exists.

That said, what do you think the ideal interest rate would be? I think it should be at least 40%, so that the currency that we're forced to use is stronger and so that peoples' savings get strengthened rather than wiped out. That way, no one ever borrows.

The only downside I see with a Federal interest rate of 40% is that 40% truly is above what the market would charge, but with the Federal reserve, you aren't going to have market-based interest rates anyway.

The ideal rate is constantly changing. It is determined by the amount of money to lend, IE savings, and the amount of demand for loans. The more savings and the fewer loan requests, the less the interest rate should be to attract more borrowers. The fewer savings there are and the more loan requests there are, the higher the rate should be to attract more savings. This is exactly the reason why the Fed cannot and can never set a proper interest rate. Any rate it sets is set because they only care about trying to steer the market.

 

[noxagol]

Which still leaves the question- how does one know if rates are too high or too low? Too high or too low for what? What should the proper rate be for banks to borrow money from the Fed?

That's just the thing, there is no way to know. There are only going to be two parties that will know if the rate is too high or too low, the borrower and the lender, and only for that instance.

 

[Zippyjuan]

A bank sets a rate that customers like me can borrow from it. If I don't like it, I can try to shop around. The Fed sets a rate that its customers can borrow from it- it is the bank for banks. If a bank needs funds they are not only able to borrow from the Fed- there are other alternatives such as other banks or financial institutions available to them as well.

By what mechanism would you suggest that the Fed determines the rates it will lend money at? Can that mechanism also be used if I wish to borrow from another bank?

 

[dean.engelhardt]

If the Fed has to exist, what do you think an ideal interest rate is?

The interest rate determined by the market.

 

[fletcher]

In the early 80s the rate was close to 20% and things are much worse now. To stop inflation it has to go over 20%.

 

[hazek]

Which still leaves the question- how does one know if rates are too high or too low? Too high or too low for what? What should the proper rate be for banks to borrow money from the Fed?

How do we know? Hello? Were you sleeping for the past 4 years since the housing market bubble burst? Do you really think the level of credit and debt that was issued to perpetuate that bubble would have been possible without the too low interest rate that the FED has set to prop up the market after the NASDAQ bubble burst?

Of course I'm not saying that we can know what the right interest rate is, only the market can continuously figure that out but I know that after seeing the level of debt we have and that the market is trying to purge itself from it but can't because of all this cheap money I think it's pretty fair assumption to make that the rates are artificially too low. I mean the whole point behind the FED or any central bank is to keep the interest artificially lower so that the governments can borrow more than the market would have otherwise be willing to lend. It's the only way to achieve that result, i.e. keeping rates artificially low.

 

[Zippyjuan]

In the early 80s the rate was close to 20% and things are much worse now. To stop inflation it has to go over 20%.

The Fed raised the interest rates that high to try to tame inflation- it came at the cost of higher unemployment for a few years but did break the high inflation cycle. Inflation now is nowhere near as high as it was back then. Things went from double digit inflation to double digit unemployment (inflation was over 13% and later unemployment hit over 10%).

 

[hazek]

By what mechanism would you suggest that the Fed determines the rates it will lend money at?

Unless you know of the existence of a super genius that is smarter than the combined market place of 6 billion people THERE IS NO SUCH MECHANISM ON THIS PLANET, EXCEPT THE MARKET PLACE.

Stop cheerleading for the scum of the earth - the central banks, please I beg you, if not for yourself do it for the sake of your children.

 

[hazek]

The Fed raised the interest rates that high to try to tame inflation- it came at the cost of higher unemployment for a few years but did break the high inflation cycle. Inflation now is nowhere near as high as it was back then. Things went from double digit inflation to double digit unemployment (inflation was over 13% and later unemployment hit over 10%).

Yea of course inflation is no where those levels if you stick your head in the sand or cover your ears and sing "lalalalala, I can't hear you". Aren't you forgeting how the method of calculating the official CPI numbers is constantly changing to hide inflation? Or are you just cheerleading for the FED?

Man you piss me off.

 

[Zippyjuan]

How do we know? Hello? Were you sleeping for the past 4 years since the housing market bubble burst? Do you really think the level of credit and debt that was issued to perpetuate that bubble would have been possible without the too low interest rate that the FED has set to prop up the market after the NASDAQ bubble burst?

Of course I'm not saying that we can know what the right interest rate is, only the market can continuously figure that out but I know that after seeing the level of debt we have and that the market is trying to purge itself from it but can't because of all this cheap money I think it's pretty fair assumption to make that the rates are artificially too low. I mean the whole point behind the FED or any central bank is to keep the interest artificially lower so that the governments can borrow more than the market would have otherwise be willing to lend. It's the only way to achieve that result, i.e. keeping rates artificially low.

Inflation was low and the economy was strong. There was no real reason to raise interest rates at that time. Mortgage rates are (as mentioned earlier) determined by ten year Treasury rates which are not set by the Fed anyways (that impacts short term rates- not longer term ones like mortgages)- those are free market auction determined. I myself was waiting to refinance my home and was watching the Fed lower its discount rate- but mortgage rates continued to rise at the time. They eventually came down and I was able to refi.

 

[hazek]

There was no real reason to raise interest rates at that time.

Hold the horses! So preventing a major, monumental housing bubble that destroyed millions of people is no good reason? Really? Get a fking clue, will you.

 

[hazek]

They eventually came down and I was able to refi.

Yeah and you think there was no real reason for that to happen? You think the low interest rates the FED has set had nothing to do with that? Nothing but slimy scummy propaganda.

"you know people, FED had nothing to do with it, I was trying to buy a house, hoping for low rates and eventually I got them, but pay no attention to why that might have happened, because it couldn't have been because the FED had set low interest rates, because for a while mortage rates were rising in spite, but then magically they fell, and I was able to borrow some money, so yea, it couldn't have been the FED, but don't ask me why it happened, it just happened."

 

[Zippyjuan]

You may want to take a look at this piece.
http://community.nasdaq.com/News/2011-08/what-moves-refinance-mortgage-rates.aspx?storyid=91011

What moves refinance mortgage rates?[/QUOTE]

Interest rates, including mortgage rates, move with the economy.

"When the economy is weak, and inflation is low or falling, people tend to move into conservative investments like bonds," says Keith Gumbinger, vice president of HSH.com. "This demand drives bond prices higher and yields lower, and serves to influence mortgage rates downward. The lowest mortgage rates often come amid the bleakest economic conditions."

When the European economy was threatened by instability in Greece and other countries, investors worldwide turned to American bonds as safe investments; that helped lower U.S. interest rates.

Mark Greenberg of Wealth & Tax Planners in Walnut Creek, Calif., says, "Long term rates are set by the 'market' (traders, banks, etc., i.e. the participants' collective wisdom about where rates should be). Mortgage rates, he explains, tend to follow the rates on 1, 5 and 10-year Treasury notes.

"As demand pushes bond prices up, they cost more, so they yield less (investors pay more for the same dividend amount). The converse is also true."

The Fed

Reading the financial news, it's easy to think that if your mortgage rate went up, it's because the Fed "raised" interest rates. That's simply not the way it works.

Savings institutions are required to maintain a certain level of deposits, called reserves, with the Federal Reserve Bank, to make sure that there is money to pay depositors when they want it. The Fed supervises overnight loans of these reserves from one bank to another to cover fluctuating needs for cash.

Why the Fed has little control over mortgage rates

So when the Federal Reserve "changes" the rate on these loans (called the Federal Funds rate), it simply uses its control over the supply of money to influence rates. It can't dictate what banks charge, and the Fed's influence over short-term rates does not extend to mortgage rates.

"Unlike the direct purchases of MBS last year (QE1), the Fed's purchases of Treasury debt (QE2) wasn't specifically aimed at adding liquidity to mortgage markets in hopes of lowering mortgage rates directly," says Gumbinger. "Rather, it was expected that there would be some beneficial market-related effect as investors sought out higher-yielding, but riskier assets, including mortgage backed-securities. While the Fed's program may have helped some other interest rates to decline or stocks to rise, there was not much overall effect on mortgage rates."



Read more: http://community.nasdaq.com/News/20...rtgage-rates.aspx?storyid=91011#ixzz1VJdkqtmo

 

[fletcher]

The Fed raised the interest rates that high to try to tame inflation- it came at the cost of higher unemployment for a few years but did break the high inflation cycle. Inflation now is nowhere near as high as it was back then. Things went from double digit inflation to double digit unemployment (inflation was over 13% and later unemployment hit over 10%).

The official interest rate may not be that high, but that is just your lying government. Actual inflation is pretty close and will soon far surpass anything seen in the 70s or 80s. Conditions today are far worse than anything seen in that period. The amount of money created and the amount of debt far surpass anything from then. The interest rate needs to dramatically rise to stop massive inflation. Of course the government would default but its better they do it honestly than destroying the dollar. And the fed can't stop unemployment from rising. Intrest rates are at 0 and unemployment will soon be over 10%.

 

[Zippyjuan]

The official interest rate may not be that high, but that is just your lying government. Actual inflation is pretty close and will soon far surpass anything seen in the 70s or 80s. Conditions today are far worse than anything seen in that period. The amount of money created and the amount of debt far surpass anything from then. The interest rate needs to dramatically rise to stop massive inflation. Of course the government would default but its better they do it honestly than destroying the dollar. And the fed can't stop unemployment from rising. Intrest rates are at 0 and unemployment will soon be over 10%.

You are right- the Fed cannot lower the unemployment rate. That will only go down when businesses start to hire more people- and the Fed can't force them to do that. They won't hire until they see their sales increase enough to justify it.

 

[Microsecessionist]

Then what would the Fed have to do to contract the money supply if they don't raise commercial banks' interest rates to do so?

The Fed should be abolished, I certainly agree with that. But I don't understand a lot of the replies.