The Official Dec. 16 Fed Rate-Hike Thread

[wizardwatson]

I'm just glad we have a bunch of smart fellas like Janet Yellen to figger this stuff out for us.

'Coz, like, you know, otherwise we'd have to let the free market sort things out ...

The money power, the true root of the state, has always been at the core of the problem.

“Bankers own the earth; take it away from them but leave them with the power to create credit; and, with a flick of a pen, they will create enough money to buy it back again… If you want to be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and control credit.”- Sir Josiah Stamp, Director, Bank of England, 1940

However, the various mechanisms involved are complex. It's easy to see the utility of the power, but to contain it requires a mind that won't obsess over its utility. The very knowledge of the power of economics is a moral hazard.

“The few who understand the system, will either be so interested from its profits or so dependent on its favors, that there will be no opposition from that class.” . . . “Let me issue and control a nation’s money and I care not who writes the laws.” – Mayer Amschel Bauer Rothschild, 1744-1812

It's really not all that hard to grasp it if one puts forth sufficient effort.

“Whoever controls the volume of money in any country is absolute master of all industry and commerce. And when you realize that the entire system is very easily controlled, one way or another by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.” – President James Garfield, 1881. He was assassinated just weeks after making this statement.

But as James found out, it can be more than a moral hazard.

And Abe.

“The death of Lincoln was a disaster for Christendom. There was no man in the United States great enough to wear his boots…I fear that foreign bankers with their craftiness and their torturous tricks will entirely control the exuberant riches of America, and use it systematically to corrupt modern civilization. They will not hesitate to plunge the whole of Christendom into wars and chaos in order that the earth shall become their (the bankers’) inheritance.” – Chancellor of Germany, Otto Von Bismarck, 1865

Their end game is pretty dark.

And don't expect help.

“I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man that controls Britain’s money supply controls the British Empire, and I control the British money supply.” Baron Nathan Mayer de Rothschild, 1840-1915

But if you remember anything, when you are looking for a light in the utter blackness, don't forget...

 

[Madison320]

Well, I'm sure that'll be Schiff's argument too.

"What I meant, obviously, was that the Fed would never raise rates by a "substantial" amount."

Actually he said many, many times that he thought they might make a tiny rate hike.

Do you think .25% is a fairly normal rate of interest? Do you think QE and ZIRP will lead to a healthy economy?

 

[wizardwatson]

Actually he said many, many times that he thought they might make a tiny rate hike.

Do you think .25% is a fairly normal rate of interest? Do you think QE and ZIRP will lead to a healthy economy?

I think this system of booms and busts can go on for a long, long time. I think they are getting quite proficient at dealing with the resulting civil unrest and market turmoil it causes. I think we should be coming up with strategies to combat it instead of fear-mongering over the downside.

 

[Zippyjuan]

Actually he said many, many times that he thought they might make a tiny rate hike.

Do you think .25% is a fairly normal rate of interest? Do you think QE and ZIRP will lead to a healthy economy?

If higher rates would be better for the economy would 20% rates be better?

 

[gonegolfin]

The Fed is setting very short term interest rates- the rates banks borrow from the Fed overnight. Changes in short term rates do not necessarily impact long term rates but you did get locked in on a good one. Mortgage rates follow ten year Treasury notes.

Sorry Zippy ... could not let this go.

The banks are not borrowing from the Fed overnight. Bank borrowing from the Fed has never been a normal part of monetary policy operations. The discount window programs (primary, secondary, and seasonal) that have their own interest rates set by the Fed are not often used ... and are not used to conduct monetary policy.

In traditional monetary policy (which has not existed since late 2008 when the Fed began paying interest on reserves), the Fed would set a target rate for Federal Funds. They did not set an interest rate. The implementation of this target rate was achieved by managing the supply of reserves by injecting and/or draining reserves in the system (using TOMOS).

Since this time, the target rate for federal funds (traditional monetary policy) has been impotent. The rate that now matters is IOR (interest on reserves). It is now at 0.50%. For borrowers in the overnight markets, the rate at which they borrow from the banks supplying these reserves funds (not the Fed itself) is set by supply and demand ... but only within a window that the Fed has concocted. But at rates below 50 bps, the banks are not lending their own reserves funds to other reserves needy banks. Why would they? It would not make sense. Thus, this overnight lending market is limited to member institutions supplying funds that are not eligible for IOR payments by the Fed ... and the smaller banks that are not flush with reserves that actually need the funds. What keeps the federal funds rate from plummeting towards zero (and above the 0.25% floor the Fed would like to maintain)? Open market operations (temporary) that drain reserves from the system.

This is the new normal of Fed monetary policy. It is their method of sterilization. Meanwhile, the amount of total reserves and the total Fed balance sheet size is not changing. In fact, as securities mature, they are not allowing those reserves to disappear into the ether ... but are rolling them over into new purchases. Thus, this is simply a way to artificially set interest rates (in lieu of the market setting interest rates) and the silent announcement that there will not be an exit policy (as I have always known, for a variety of reasons that are all Fed balance sheet related).

For a refresher ... you can visit my stash of essays here at Financial Sense.

Also, mortgage rates are certainly influenced by the 10-year bond. But not nearly as much as they used to be. Mortgage rates are more influenced by the secondary mortgage market and the securities bought/sold by the players that drive these markets. Banks rarely keep the paper (mortgages) they sell to consumers anymore.

Brian

 

[gonegolfin]

Well, I'm sure that'll be Schiff's argument too.

"What I meant, obviously, was that the Fed would never raise rates by a "substantial" amount."

What matters is what the Fed is doing with excess reserves and the total size of the Fed balance sheet. Nothing has changed here.

IOW, it is important to understand that we certainly could have monetary easing ... while having higher "interest rates" (artificial) at the same time.

Brian

 

[stuntman stoll]

If higher rates would be better for the economy would 20% rates be better?

No, free market interest rates would be better

 

[Zippyjuan]

If today's rates are wrong, what should they be? Should rate be higher? Who benefits from higher rates? Banks can use higher rates to attract more deposits which they can then loan out and profit from the fees and interest spread. Are they short of capital? Banks currently have $2.5 trillion in "excess reserves". They don't need more capital. Should mortgage rates be higher? Is there too much demand for mortgage loans? Should bond rates be higher? Bond prices are determined by auctions- the free market. Is the economy too strong and rates should be lower to slow down price inflation? Interest rates also follow the rate of price inflation- interest rates are higher when inflation is higher. Is inflation high or rising justifying higher interest rates? (investors and lenders want to at least break even on their loans- they add the expected rate of inflation to a "premium" to determine what rate they want/ are willing to accept).

What should rates be and why? If you feel they are not correct then perhaps you have some idea of what they should be.

 

[wizardwatson]

If today's rates are wrong, what should they be? Should rate be higher? Who benefits from higher rates? Banks can use higher rates to attract more deposits which they can then loan out and profit from the fees and interest spread. Are they short of capital? Banks currently have $2.5 trillion in "excess reserves". They don't need more capital. Should mortgage rates be higher? Is there too much demand for mortgage loans? Should bond rates be higher? Bond prices are determined by auctions- the free market. Is the economy too strong and rates should be lower to slow down price inflation? Interest rates also follow the rate of price inflation- interest rates are higher when inflation is higher. Is inflation high or rising justifying higher interest rates? (investors and lenders want to at least break even on their loans- they add the expected rate of inflation to a "premium" to determine what rate they want/ are willing to accept).

What should rates be and why? If you feel they are not correct then perhaps you have some idea of what they should be.

Do you think bubbles are a problem Zippy? The Fed does. Do you think there are any monetary system protocols that could mitigate bubbles? Computer models show that bubbles form with or without a Fed (or so I've heard).

It seems without a Fed we still have bubbles, though not as intense, but we're burdened with deflationary liquidity problems and hoarding. With a Fed we err on the inflationary side, no major deflationary problems but more destructive bubbles.

What is the solution to this?

Merry Christmas!

 

[Occam's Banana]

If today's rates are wrong, what should they be? Should rate be higher? [...]

What should rates be and why? If you feel they are not correct then perhaps you have some idea of what they should be.

One might as sensibly ask, "What color should the sky at dusk be?" ...

Rates are just prices - and like all other prices, the free market should be left to "decide" what they "should" be (as a result of the organic, spontaneous, unfettered and ever-changing interplay of supply and demand). Neither you nor I nor the Board of Governors of the Federal Reserve has any legitimate business declaring that rates "should" be this, that or the other particular value.

 

[Zippyjuan]

So how do we know that current rates are not what the market chooses at this time?

 

[Occam's Banana]

So how do we know that current rates are not what the market chooses at this time?

The same way we know that the current minimum wage (which, like rates, is just another price) is not what the market "chose" - i.e., because the market did not "choose" them. (And if you are trying to suggest that current rates might be what the market would have "chosen" absent the Fed's interference, then what's the point of the Fed's interference with rates in the first place? But if current rates are not what the market would have "chosen," then I refer you back to post #50 ...)

 

[devil21]

What matters is what the Fed is doing with excess reserves and the total size of the Fed balance sheet. Nothing has changed here.

IOW, it is important to understand that we certainly could have monetary easing ... while having higher "interest rates" (artificial) at the same time.

Brian

Good to see you posting again. WB!

 

[Zippyjuan]

The same way we know that the current minimum wage (which, like rates, is just another price) is not what the market "chose" - i.e., because the market did not "choose" them. (And if you are trying to suggest that current rates might be what the market would have "chosen" absent the Fed's interference, then what's the point of the Fed's interference with rates in the first place? But if current rates are not what the market would have "chosen," then I refer you back to post #50 ...)

There are several reasons that interest rates would probably not be that much different from where they are now absent any Fed actions.
1) Price inflation is very low.
2) There is a large supply of money available to be lent out (that $2.5 trillion in "excess reserves")
3) Demand for that money is still low despite improvements in the economy (corporations sitting on $1.8 trillion excess cash of their own http://www.businessinsider.com/record-us-corporate-cash-holdings-182-trillion-2015-6 )
4) low default rates (risk) on bonds

So with high supply of money, low demand, and very low "opportunity costs", rates should be low at this time.

 

[Occam's Banana]

The same way we know that the current minimum wage (which, like rates, is just another price) is not what the market "chose" - i.e., because the market did not "choose" them. (And if you are trying to suggest that current rates might be what the market would have "chosen" absent the Fed's interference, then what's the point of the Fed's interference with rates in the first place? But if current rates are not what the market would have "chosen," then I refer you back to post #50 ...)

There are several reasons that interest rates would probably not be that much different from where they are now absent any Fed actions.
1) Price inflation is very low.
2) There is a large supply of money available to be lent out (that $2.5 trillion in "excess reserves")
3) Demand for that money is still low despite improvements in the economy (corporations sitting on $1.8 trillion excess cash of their own http://www.businessinsider.com/record-us-corporate-cash-holdings-182-trillion-2015-6 )
4) low default rates (risk) on bonds

So with high supply of money, low demand, and very low "opportunity costs", rates should be low at this time.

You don't seem to have understood the nature of my question. I was not attempting to argue or imply (as you appear to have assumed) that rates "would probably [be] much different from where they are now absent any Fed actions."

Maybe they would be. Maybe they wouldn't be. Any propositions regarding whether or not rates "would [be] that much different [...] absent any Fed actions" must necessarily be counterfactual and speculative in nature. (And a genuinely free market - without things like the Fed monkey-wrenching on the economy - would involve conditions that would be so wildly and radically different form what they actually are that all bets are off when it comes to things like trying to say what interest rates might or might not have been if such a free market had really existed ...)

In fact, not only was I not trying to argue or imply that rates "would probably [be] much different from where they are now absent any Fed actions," but my question was explicitly about a scenario in which rates were "not [...] that much different" (which is what you claim is "probably" the case):

f [...] current rates might be what the market would have "chosen" absent the Fed's interference, then what's the point of the Fed's interference with rates in the first place? But if current rates are not what the market would have "chosen," then I refer you back to post #50 ...)

In other words:

Either (1) the Fed's interventions produce the same rates (or sufficiently similar rates, for some value of "sufficient") that a free market would have produced, or (2) they do not.

If (1) is the case, then the Fed's rate interventions are uselessly superfluous and pointless - so why bother?

If (2) is the case, then refer back to post #50 ...

 

[Madison320]

Sorry Zippy ... could not let this go.

The banks are not borrowing from the Fed overnight. Bank borrowing from the Fed has never been a normal part of monetary policy operations. The discount window programs (primary, secondary, and seasonal) that have their own interest rates set by the Fed are not often used ... and are not used to conduct monetary policy.

In traditional monetary policy (which has not existed since late 2008 when the Fed began paying interest on reserves), the Fed would set a target rate for Federal Funds. They did not set an interest rate. The implementation of this target rate was achieved by managing the supply of reserves by injecting and/or draining reserves in the system (using TOMOS).

Since this time, the target rate for federal funds (traditional monetary policy) has been impotent. The rate that now matters is IOR (interest on reserves). It is now at 0.50%. For borrowers in the overnight markets, the rate at which they borrow from the banks supplying these reserves funds (not the Fed itself) is set by supply and demand ... but only within a window that the Fed has concocted. But at rates below 50 bps, the banks are not lending their own reserves funds to other reserves needy banks. Why would they? It would not make sense. Thus, this overnight lending market is limited to member institutions supplying funds that are not eligible for IOR payments by the Fed ... and the smaller banks that are not flush with reserves that actually need the funds. What keeps the federal funds rate from plummeting towards zero (and above the 0.25% floor the Fed would like to maintain)? Open market operations (temporary) that drain reserves from the system.

This is the new normal of Fed monetary policy. It is their method of sterilization. Meanwhile, the amount of excess reserves and the total Fed balance sheet size is not changing. In fact, as securities mature, they are not allowing those reserves to disappear into the ether ... but are rolling them over into new purchases. Thus, this is simply a way to artificially set interest rates (in lieu of the market setting interest rates) and the silent announcement that there will not be an exit policy (as I have always known, for a variety of reasons that are all Fed balance sheet related).

For a refresher ... you can visit my stash of essays here at Financial Sense.

Also, mortgage rates are certainly influenced by the 10-year bond. But not nearly as much as they used to be. Mortgage rates are more influenced by the secondary mortgage market and the securities bought/sold by the players that drive these markets. Banks rarely keep the paper (mortgages) they sell to consumers anymore.

Brian

A lot of that is over my head, but my guess it that the Fed will eventually run out of money to give to the banks. That may be why they launch QE4.

All I know is that you can't get something for nothing.

You can't print money without devaluing it, proportionally to the amount printed.

You can't artificially stimulate the economy without an equal or greater negative reaction in the future from that stimulus.

 

[Madison320]

What matters is what the Fed is doing with excess reserves and the total size of the Fed balance sheet. Nothing has changed here.

IOW, it is important to understand that we certainly could have monetary easing ... while having higher "interest rates" (artificial) at the same time.

Brian

I wonder how much free money the Fed provides banks annually? For example if you take the money the Fed pays interest on excess reserves, plus the money the banks make on the 0% Fed loans, plus whatever other free money that the Fed provides. I wonder what percentage of the banks profits come from Free Fed Money? My guess is a big percentage. I doubt that the banks are making much money the "normal" way by loaning out savings.

 

[Zippyjuan]

"Free money borrowing" is currently $115 million- yes, million, not billion. That is the current amount the Fed has lent out to member banks (as of 12/ 10/15). https://research.stlouisfed.org/fred2/series/DISCBORR

Excess reserves total $2.5 trillion and pay one quarter of one percent (they could get a higher rate of return if they lent that money out so actually they are "losing" by keeping the money on hand) comes to $6.2 billion a year.

Both together come to $6.3 billion.

Banking industry made about $40 billion in the last quarter- times four is $120 billion a year. http://www.wsj.com/articles/u-s-banking-industry-profits-racing-to-near-record-levels-1407773976 so about five percent from Fed monies.

 

[Bossobass]

Zippy the naive cheerleader.

Banks engage in criminal lending practices, earning fees that are rolled into the fraudulent and bad loans.

Banks package shit loans with good loans.

Banks get lackey rating agencies to stamp AAA on the shit loan packages.

Banks sell packaged loans to foreign governments, pension funds and anyone stupid enough to buy their coke-soaked sales pitches.

Banks then short he packaged loans.

SHTF.

FED buys completely worthless shit loan instruments at 105 cents on the dollar.

FED lists shit loans on balance sheet as worth 100% of price paid.

FED gets congress to allow them to pay interest on excess reserves (which may be zero).

Bailed out criminal member banks keep profits from closing fraudulent loans, selling fraudulent loans and shorting fraudulent loans.

FED buys back fraudulent loan packages at 105 cents on the dollar from their pals while letting US union's pension funds to tank miserably, hides the loans (material evidence of the massive multi-trillion dollar fraud) in their no-audit vaults, lies about winding down the balance sheet while increasing the balance sheet over the same period.

Treasury is successfully looted. No one goes to jail.

Zippy cracks champagne bottle and gets drunk with giddy admiration.

 

[NorthCarolinaLiberty]

Zippy the naive cheerleader.

Zip turned out to be anything but naive. He sure did hoodwink a few people here though.