Thoughts on the Fed Rate increase?

[Theseus]

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Originally Posted by ziggy29 Or health care? Seriously, though, the crashing of oil prices has had a massive overall impact of inflation in macro terms. It has a ripple effect on a lot of things we buy, but it doesn't feel noticeable with things like food, and *certainly* not medical care.

Businesses with energy intensive processes are undoubtedly breathing a bit easier these days. Hopefully that shows up as improved earnings.

[DEC-1982]

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Originally Posted by Hyper I have a hard time believing that many people (already retired) actually invest in the market when the rates are too low. With volatility, many may not be able to lose any money so I would think they adjust their life style to compensate for no returns instead of risking further loss. Myself, I would invest considerably in the market if I were getting some kind of return on safe investments. Because I am barely getting any return I am not willing to invest in a volatile market. I'm comfortable so why donate more than I've already lost? I don't believe the fed has the little guy's best interest in mind at all.

On the contrary, most people who have a 30-40 year outlook probably will invest a portion of their portfolio in the stock market for growth and to counter inflation. Low gains (or losses) this year doesn't mean this is the outlook for the next 30-40 years.

At least one member of a 65 year old couple will likely live till 95, and many of us retired folks are younger than that.

[Mulligan]

Quote:

Originally Posted by DEC-1982 On the contrary, most people who have a 30-40 year outlook probably will invest a portion of their portfolio in the stock market for growth and to counter inflation. Low gains (or losses) this year doesn't mean this is the outlook for the next 30-40 years. At least one member of a 65 year old couple will likely live till 95, and many of us retired folks are younger than that.

Not disputing what you say, but that reminds me of a $500 hockey bet I had in Tahoe a few years ago. Devils were up 2 goals going in the 3rd and at start of period they flashed on screen Devils 31-0 when leading heading into the 3rd period. I am thinking, well this is money in the bank...Well 20 minutes later they were 31-1 and I am out $500! Sometimes history doesn't repeat itself.
Caveat...I have a good pension, so that skews my thinking considerably. But the only thing I can stomach mostly is high yields, above common in capital structure, monopoly, and guaranteed ROE.
Fortunately most people here are not investing wimps like me...


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[mpeirce]

Quote:

Originally Posted by frank no sign of inflation, that one always gets me. where do these people buy their groceries?

It's not a secret. Have a look:

Consumer Price Index (CPI)

[DEC-1982]

Quote:

Originally Posted by Mulligan Not disputing what you say, but that reminds me of a $500 hockey bet I had in Tahoe a few years ago. Devils were up 2 goals going in the 3rd and at start of period they flashed on screen Devils 31-0 when leading heading into the 3rd period. I am thinking, well this is money in the bank...Well 20 minutes later they were 31-1 and I am out $500! Sometimes history doesn't repeat itself. Caveat...I have a good pension, so that skews my thinking considerably. But the only thing I can stomach mostly is high yields, above common in capital structure, monopoly, and guaranteed ROE. Fortunately most people here are not investing wimps like me... Sent from my iPad using Tapatalk

Mulligan, you have given me cause for thought. Let me clarify my earlier post.

The populace is diverse. There are people with defined benefit pension plans, others with defined contribution pension plans and others with no pension. There are people with rentals, others with annuities, and there are other ways to produce a fixed income stream like laddered CDs, bond income and stock or preferred stock dividends.

In a similar way, there is diversity with some people with high risk tolerance and others with lower risk tolerance.

For a sub-section of folks with no pension, no annuity, no rental, no defined income streams, the choice to invest their savings comes down to some combination of stocks, bonds, Treasuries, Savings Bonds, CDs, commodities etc to produce an income stream from that, possibly with sales along the way to add to that income. For many of this sub-section of people who need money for 30 or more years, they have to invest some portion in the stock market in order to outpace inflation and taxes.

[Al in Ohio]

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Originally Posted by explanade It's going against the tide of every other nation. Some like Japan have tried to tighten in recent years, only to be forced to go back. Some "market strategists" are saying it's still premature, with no sign of inflation at all.

It's way overdue because they went way down to an unhealthy low rate to begin with.

As for " no inflation"?. Don't go by the CPI. That's been disputed as a poor indicator. It's the governments way of sugar coating the boogeyman so it seems less harmful to us. Now it's even less informative as its heavily skewed by bargain basement gas prices.


Eggs are more than 25% higher than last year, milk costs noticeably more, and have you gone out to eat at any restaurants lately? They are charging a lot more for meals. Prices have risen and all the other indicators for economic growth went up within the last two months whereas summer was kinda flat. It was definitely overdue.


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[explanade]

But those are volatile commodities. Their prices go up and down.

Sustained inflation requires rising wages, which has not yet happened.

[Mulligan]

Quote:

Originally Posted by Al in Ohio It's way overdue because they went way down to an unhealthy low rate to begin with. As for " no inflation"?. Don't go by the CPI. That's been disputed as a poor indicator. It's the governments way of sugar coating the boogeyman so it seems less harmful to us. Now it's even less informative as its heavily skewed by bargain basement gas prices. Eggs are more than 25% higher than last year, milk costs noticeably more, and have you gone out to eat at any restaurants lately? They are charging a lot more for meals. Prices have risen and all the other indicators for economic growth went up within the last two months whereas summer was kinda flat. It was definitely overdue. Sent from my iPad using Early Retirement Forum

Beef is heading down, and the chicken flocks should be getting stronger fairly soon....Lets see if we get some of that back in our pockets soon. I am not holding my breath. But, being single food isn't a big percentage of my budget, so I am not too bothered by it.


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[RAE]

Quote:

Originally Posted by Al in Ohio Eggs are more than 25% higher than last year, milk costs noticeably more, and have you gone out to eat at any restaurants lately? They are charging a lot more for meals. Prices have risen and all the other indicators for economic growth went up within the last two months whereas summer was kinda flat. It was definitely overdue.

Well, those things may be true, but the Fed's own data contradicts their case for a rate increase. Back in Sept., they forecast that inflation in 2016 would be 1.7%. Then just recently, they revised it to 1.6%. So, either they don't believe their own data, or they raised the rate for other reason(s).
The Fed's own data contradicts its case for raising interest rates - Vox

[Senator]

The main reason the Fed had to raise rates because they talked far too long about raising them. It was a face saving event. If they didn't do it, they are all talk, no action.

The second reason is because all of the Feds members, the national banks, needed a larger interest rate spread. This creates a LOT of money for banks. As bank stock prices go up, and bank executives make more money. HELOCs, ARMs, and other loans are adjusted based on the current fed funds rate. There are a lot of loans out there, and a .25% increase in the terms is a huge amount of money.

A third reason is the Fed now pays the member banks an extra .25% (now it's .5%) to leave the banks overnight surplus funds at the Fed. The Banks can deposit their extra money that they have not yet loaned out at the Fed, and get .5% on their money. Risk free. As much as they can put there. Try and get a 1-day rate of .5% for yourself. It's difficult.

It had noting to do with inflation, as we are in a deflationary spiral. Electronics get cheaper, oil gets cheaper, the USD get stronger which makes imported goods even more cheaper, etc.

There is a labor surplus in the USA, and the World, and it is getting worse. We are getting more and more efficient. We create less jobs than we have people to fill them. We import cheaper tech and manual labor. Companies have plenty of workers applying for the jobs they have available, there is no need to raise wages. If wages rise, more technology is produced to eliminate jobs, or more jobs get imported. Or jobs exported.

The stock market may be stagnant for a long time, be ready.

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Originally Posted by Al in Ohio They should have started with a full 100 basis points. This is wimpy start to a long overdue rate tightening. It will be nice when we get over 5 percent again.

Congress can just mandate that Banks pay a minimum of 5% on all deposits. That would make everything all better.

[DrRoy]

To your official question, the Fed pretty much said what they were going to do, they did what they said, so the market had mostly priced in what was done but rallied initially just from having the uncertainty removed. From here it is going to be reaction to future news on the economy, earnings, oil, etc.

I think your opening comment on your investments not doing much this year raises a different but valid issue, which is how we react to market movements (or the lack thereof) and to our investments. I agree that this year's flat market has been annoying, but some years are just like that. We need to accept that some market years are flat, which is better than a decline, and that over time markets have eventually gained due to rising population, productivity, and economic activity. It says nothing about next year however, which could be up, down, or flat again.

[HFWR]

Quote:

Originally Posted by HFWR Market is reacting positively, so far...

Guess the market lost changed its mind...

As for CPI, it is what it is. The BLS site lists other inflation indices as well. It's just that those other indices don't have as much visibility to the media/public.

None, however, are designed to exactly model someone's personal rate of inflation.

[RAE]

Quote:

Originally Posted by Senator The main reason the Fed had to raise rates because they talked far too long about raising them. It was a face saving event. If they didn't do it, they are all talk, no action. The second reason is because all of the Feds members, the national banks, needed a larger interest rate spread. This creates a LOT of money for banks. As bank stock prices go up, and bank executives make more money. HELOCs, ARMs, and other loans are adjusted based on the current fed funds rate. There are a lot of loans out there, and a .25% increase in the terms is a huge amount of money. A third reason is the Fed now pays the member banks an extra .25% (now it's .5%) to leave the banks overnight surplus funds at the Fed. The Banks can deposit their extra money that they have not yet loaned out at the Fed, and get .5% on their money. Risk free. As much as they can put there. Try and get a 1-day rate of .5% for yourself. It's difficult. It had noting to do with inflation, as we are in a deflationary spiral. Electronics get cheaper, oil gets cheaper, the USD get stronger which makes imported goods even more cheaper, etc. There is a labor surplus in the USA, and the World, and it is getting worse. We are getting more and more efficient. We create less jobs than we have people to fill them. We import cheaper tech and manual labor. Companies have plenty of workers applying for the jobs they have available, there is no need to raise wages. If wages rise, more technology is produced to eliminate jobs, or more jobs get imported. Or jobs exported. The stock market may be stagnant for a long time, be ready.

Senator - agreed. And this then leads to the next question, which is - how long do you think it will be before the Fed is basically forced to go back to ZIRP? My guess is, not all that long - I think it will happen sometime in 2016. Japan and the European Central Bank both tried to raise interest rates prematurely in recent years, with very bad outcomes. The problem is that Bernanke got everyone hooked on basically free money, and once you do that, there is no easy way to get out of the trap. This is a grand experiment, as they've never had to try to get out of this kind of situation before, and get back to normalcy. And to make things worse, if the Fed does have to admit that they screwed up, and go back to ZIRP, they are basically then admitting that the economy sucks, and that we are in a deflationary spiral, and they have no idea how to get out of this mess. The markets will not react well to that.........

[Hamlet]

Quote:

Originally Posted by Al in Ohio It's way overdue because they went way down to an unhealthy low rate to begin with. As for " no inflation"?. Don't go by the CPI. That's been disputed as a poor indicator. It's the governments way of sugar coating the boogeyman so it seems less harmful to us. Now it's even less informative as its heavily skewed by bargain basement gas prices. Eggs are more than 25% higher than last year, milk costs noticeably more, and have you gone out to eat at any restaurants lately? They are charging a lot more for meals. Prices have risen and all the other indicators for economic growth went up within the last two months whereas summer was kinda flat. It was definitely overdue. Sent from my iPad using Early Retirement Forum

I'm not sure where you're shopping, but this year every time I go to the grocery store milk is cheaper than it was the last time I was there.

Plunge In Milk Prices Stresses Dairy Farmers - Dairy - News | Agweb.com

Pretty much everyone I hear disputing CPI is noticing the stuff that is going up and ignoring the stuff that is going down. I've never seen anyone keep track of actual data get too far from CPI without having a basket of goods that is pretty different than what most people buy.

Inflation is the lowest it has been in my lifetime. Gas is cheaper than it has been in 10 years, except for a brief little bit at the height of the financial crisis.

[LARS]

I guess my insurance agent, Chubb, didn't get the message on inflation as my home owners insurance (as another anecdotal point) is up 7.3% year over year...


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[Running_Man]

The Federal Reserve is trying to attempt something that has never been successfully implementing - to get off zero interest rates. So the likelihood of this working is also not too probable. The very business that is created as a result of super low interest rates become imperiled with the rise in rates causing contraction and leading to need for more stimulus. We shall see but it seems to me the economy worldwide is much weaker than it was a year ago and this is not going to help improve economics, only banks that might have upcoming stress.

[Mulligan]

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Originally Posted by Running_Man The Federal Reserve is trying to attempt something that has never been successfully implementing - to get off zero interest rates. So the likelihood of this working is also not too probable. The very business that is created as a result of super low interest rates become imperiled with the rise in rates causing contraction and leading to need for more stimulus. We shall see but it seems to me the economy worldwide is much weaker than it was a year ago and this is not going to help improve economics, only banks that might have upcoming stress.

Plus, they have never attempted to raise rates so late in a "recovery cycle" along with official inflation at a very low rate. Thank you very much Feds... You are insuring my "long preferreds" stay safe for quite a while.


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[VFK57]

Quote:

Originally Posted by Al in Ohio It's way overdue because they went way down to an unhealthy low rate to begin with. As for " no inflation"?. Don't go by the CPI. That's been disputed as a poor indicator. It's the governments way of sugar coating the boogeyman so it seems less harmful to us. Now it's even less informative as its heavily skewed by bargain basement gas prices. Eggs are more than 25% higher than last year, milk costs noticeably more, and have you gone out to eat at any restaurants lately? They are charging a lot more for meals. Prices have risen and all the other indicators for economic growth went up within the last two months whereas summer was kinda flat. It was definitely overdue. Sent from my iPad using Early Retirement Forum

+1. Rent and housing prices went through the roof in some regions while Gas prices are down.

[jim584672]

They say a 2% inflation rate is stable prices. Sorry but 0% is stable in my book.

[audreyh1]

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Originally Posted by jim584672 They say a 2% inflation rate is stable prices. Sorry but 0% is stable in my book.

Modern history indicates that economies don't work well at 0% inflation. 2% inflation seems to be the minimum for a healthy growing economy.