Fed Policy Change

[REWahoo]

Always happy to have another voice to add to the forum financial collective consciousness, but the discussion and debate about (and between) deflation and inflation has been fully underway for years.

+1
Helena, I notice you have been away from the forum for several years. Do a search and you will find many discussions related to this topic.

Edit : X-post with MichaelB.

 

[M Paquette]

Sooner or later the Fed will raise rates.

Yup. And my experience has been that the Fed will raise rates a few months after everyone else has already raised rates, for high quality private issues and market bond trades (via discount from face value).

It is very unlikely that a Fed hike will come as a shock to the market.

 

[Options]

There's a good reason why predictions are all over the map. That's b/c no one knows for sure. After 30 years of investing & tracking the equity market, the only thing I am sure about global/US economy is that it is far more complex than beyond anyone's imagination.

+1
Validated by the long, failed history of "predictions". Validated by extensive research as well.

 

[smurphy1]

The problem with Fed policy is it has very little direct effect so its quantifiable effects are small. The largest effect is probably changes in investor and consumer confidence. The problem with this is that it is unsupported by any direct effect which means it comes about because people think Fed policy is having an effect and can disappear as soon as they stop thinking that. So I tend not to hang my hat on that as its not quantifiable and very finicky.

Federal fiscal policy on the other hand has a very quantifiable direct effect the problem is we aren't using it. The federal deficit is too small to create significant improvement in the economy and if politicians take their deficit cutting too far (which seems likely) they will end up causing another 2008 style depression in 10 - 15 years.

 

[audreyh1]

Here is what the bond market currently predicts:

Sept 2015 - Fed tightens to 1/2%
March 2016 - 1%
Feb 2017 - 2%
Sep-2018 - 3%
mid-2022 - 4%

capecod over on M* points out that it's extremely likely that we have a recession before for 2022, so chances are the rates will drop again before rising to that 4% value.

In 2019, the 5yr Treasury is expected to yield 3.5% (currently 1.48%).

Inflation expectations over the next:
5 yrs: 1.98%
10 yrs: 2.19%
30 yrs: 2.32%

this is all courtesy of UPDATE: Market-Based Rate Predictions

So we are probably talking an incredibly gradual Fed tightening cycle, almost 2 years to get to a Fed funds rate of 2%. And what we have seen so far is that as the Fed becomes less accommodative, long term interest rates continue to drop. Why? Well, less help for the economy tends to slow the economy, reducing the expectations of high interest rates in the future.

Personally, I doubt we see serious inflationary pressures until 2017, when the unemployment rate might start dropping suddenly due to worker shortages. Yes - you heard that right, worker shortages due to demographics. This may create wage pressures, and wage pressures do tend to fuel inflation.

In the meantime, the slowing global economy and still highish unemployment rate act to dampen inflationary pressures.

Even though food and fuel prices increases hit people in their pocket book, they don't create inflationary pressures on an economy. Rather, they act like a drag or a tax, limiting the funds that can be spent on other items. They tend to slow the economy rather than goose it.

Just my perspective.

Audrey

 

[Helena]

.

Another interesting article:

" Goldman Sachs Group Inc. (GS) President Gary Cohn said
low volatility and interest rates that are holding in tight ranges
have resulted in an “abnormal” trading market. "

Goldman’s Cohn Says Inactive Trading Environment Is Abnormal - Bloomberg

.

 

[audreyh1]

.

Another interesting article:

" Goldman Sachs Group Inc. (GS) President Gary Cohn said
low volatility and interest rates that are holding in tight ranges
have resulted in an “abnormal” trading market. "

Goldman’s Cohn Says Inactive Trading Environment Is Abnormal - Bloomberg

.

That's funny. Poor guys can't make any money unless there is volatility.

Volume has been dropping over the years anyway. Seems like the amount of high frequency trading has dropped.

 

[Helena]

That's funny. Poor guys can't make any money unless there is volatility.

Volume has been dropping over the years anyway. Seems like the amount of high frequency trading has dropped.

Baron Rothschild, who made a mint during the panic following Napoleon's Waterloo, is reported to have said "buy when there is blood in the streets."

Some claim the Rothschild banking family fostered such panics.


.

 

[Dash man]

Here is what the bond market currently predicts:

Sept 2015 - Fed tightens to 1/2%
March 2016 - 1%
Feb 2017 - 2%
Sep-2018 - 3%
mid-2022 - 4%

capecod over on M* points out that it's extremely likely that we have a recession before for 2022, so chances are the rates will drop again before rising to that 4% value.

In 2019, the 5yr Treasury is expected to yield 3.5% (currently 1.48%).

Inflation expectations over the next:
5 yrs: 1.98%
10 yrs: 2.19%
30 yrs: 2.32%

The Fed wants to keep interest rates lower than the inflation rate to keep the government's debt under control by paying it down with inflated dollars. They will only increase interest rates higher than the inflation rate if inflation appears to be getting out of control. During the next recession with rates already so low, the only option the Fed has is to resume more QE which really doesn't help the economy, just the banks. We most likely will see more deflation in asset prices. Following the deflation, inflation will likely return, but at what level is anybody's guess. If it gets out of hand and confidence is lost in the dollar, things could get really interesting.

 

[Helena]

The Fed wants to keep interest rates lower than the inflation rate to keep the government's debt under control by paying it down with inflated dollars. They will only increase interest rates higher than the inflation rate if inflation appears to be getting out of control. During the next recession with rates already so low, the only option the Fed has is to resume more QE which really doesn't help the economy, just the banks. We most likely will see more deflation in asset prices. Following the deflation, inflation will likely return, but at what level is anybody's guess. If it gets out of hand and confidence is lost in the dollar, things could get really interesting.

We may already be at this stage.


.

 

[audreyh1]

The Fed wants to keep interest rates lower than the inflation rate to keep the government's debt under control by paying it down with inflated dollars. They will only increase interest rates higher than the inflation rate if inflation appears to be getting out of control. During the next recession with rates already so low, the only option the Fed has is to resume more QE which really doesn't help the economy, just the banks. We most likely will see more deflation in asset prices. Following the deflation, inflation will likely return, but at what level is anybody's guess. If it gets out of hand and confidence is lost in the dollar, things could get really interesting.

And pile into which currency? Europe economy and inflation is lower than US, global economy is slowing. It's hard to see an alternative.

People piled into gold during the panics of 2011, and look at where we are now.

 

[Dash man]

And pile into which currency? Europe economy and inflation is lower than US, global economy is slowing. It's hard to see an alternative.

If deflation us on its way, cash is king. But need to be ready move as things like inflation develop. The price of gold has been heading down and would probably be good to add physical gold to a portfolio, up to 10% or so. Stocks should be in companies that provide needs, such as transportation, energy, food, and things that have the ability to raise prices as costs go up. Avoid financial stocks or leveraged stocks.
Or just go along for the ride and hope this is all just doomsday rhetoric.

 

[Dash man]

And pile into which currency? Europe economy and inflation is lower than US, global economy is slowing. It's hard to see an alternative.

People piled into gold during the panics of 2011, and look at where we are now.

China, Russia and Brazil want to stop using the US Dollar as the world's reserve currency, so a financial crisis that results in loss of confidence in the dollar could trigger that. Who knows? We may end up back on the gold standard or using a new world currency through the IMF as the new reserve currency.
Gold prices have been repressed by the world"s central banks for years. To go back on the gold standard it would have to be priced five or six times higher than it is now. I'm not predicting it will happen, just that it is a possibility in a crisis.

 

[nash031]

And pile into which currency? Europe economy and inflation is lower than US, global economy is slowing. It's hard to see an alternative.

People piled into gold during the panics of 2011, and look at where we are now.

Yeah, everytime I read these posts on various forums that sound like Porter Stansbury wrote them, I ask: what's the alternative? It ain't the Yuan. It ain't the Euro. It ain't the Yen... before the dollar goes away, something has to replace it, and there is no currency out there that's a remote threat at this point, IMO.

There is no doubt in my mind that at some point, something will replace the dollar as the world's currency of choice. I just don't think it's going to happen in my lifetime.

 

[nash031]

China, Russia and Brazil want to stop using the US Dollar as the world's reserve currency...

Of course they do. It's in their interest to do so. But it's not really in the interest of anyone else at this point...

 

[Dash man]

The IMF acts as the world's central bank and uses the SDR, which may replace the dollar as the reserve currency eventually. It's based on a basket of currencies including the dollar. China has been increasing its gold holdings to increase its influence with the IMF. You know how those with agendas love to take advantage of a crisis...

 

[audreyh1]

China, Russia and Brazil want to stop using the US Dollar as the world's reserve currency, so a financial crisis that results in loss of confidence in the dollar could trigger that. Who knows? We may end up back on the gold standard or using a new world currency through the IMF as the new reserve currency.
Gold prices have been repressed by the world"s central banks for years. To go back on the gold standard it would have to be priced five or six times higher than it is now. I'm not predicting it will happen, just that it is a possibility in a crisis.

Yeah, right. Haven't you heard the expression "When the US sneezes, the rest of the world catches a cold"? In other words - in a financial crisis, the dollar becomes the "safe haven" currency. Just look at 2008 to see this effect. Russia and Brazil haven't a leg to stand on, no matter what they might "want". The Yuan? We'll see, but they export so much to the US that they are forced to hold huge amounts of US currency.

It will be decades before some other currency becomes the safe haven in a financial crisis - which are always global, BTW.

Gold prices were repressed in 2011, 2012? I don't think so. Gold prices have dropped because the anticipated inflation from two years ago didn't materialize, and global deflation looks more likely. And we got past the Euro/Greece crisis plus Congress stepped back from the defaulting brink.

 

[audreyh1]

Of course they do. It's in their interest to do so. But it's not really in the interest of anyone else at this point...

+1

 

[Dash man]

Yeah, right. Haven't you heard the expression "When the US sneezes, the rest of the world catches a cold"? In other words - in a financial crisis, the dollar becomes the "safe haven" currency. Just look at 2008 to see this effect. Russia and Brazil haven't a leg to stand on, no matter what they might "want". The Yuan? We'll see, but they export so much to the US that they are forced to hold huge amounts of US currency.



It will be decades before some other currency becomes the safe haven in a financial crisis - which are always global, BTW.



Gold prices were repressed in 2011, 2012? I don't think so. Gold prices have dropped because the anticipated inflation from two years ago didn't materialize, and global deflation looks more likely. And we got past the Euro/Greece crisis plus Congress stepped back from the defaulting brink.

No one has said that China or Russia's currency would become the world's reserve currency. But that doesn't mean they don't have influence in the IMF. Don't presume to know what China will or won't do to achieve their objectives. None of this could happen unless the world loses confidence in the dollar, so it wouldn't be the "safe haven" that it has been in the past. The US has a high debt/GDP ratio with entitlements sending it even higher on the horizon. The crisis in Greece was minuscule compared to where we're headed. The 2008 crisis was only fixed with a band-aid because all the bad private debt was simply taken on by the government and hasn't gone away. There is potential for the IMF SDR to become the world's reserve currency and was used to help with the recent crisis in Europe. The dollar may remain the reserve currency but we may end up back on the gold standard. Nobody can know for certain what will happen, but the future will likely be a rocky one.

 

[audreyh1]

What influence does the IMF have on global economies? They are there to help the little guy.

Never say never, but the US returning to the gold standard in my lifetime seems pretty close to it.

 

[CaliforniaMan]

Those interested in the economy and how it may affect their money, their lifestyle and their retirement should weigh a lot of various information and opinions so they can make educated decisions about their personal finances. That is what I do. I like thinking outside the box. As I posted previously, deflation/inflation is cyclic and economic trends change. When I first came to this forum, I posted about deflation which was not yet part of the accepted mantra. On this topic, I have posted an article about inflation, which is now being reintroduced to the financial collective consciousness.
.

Everyone is interested in the economy and how it will affect their money, lifestyle and retirement. But what I fail to understand is how weighing a lot of various information and opinions will help. And where is "outside the box" anyway? Will any of this change my AA or WR? All I can see this is taking time away from living and enjoying life to worry about things over which I have no control. Sorry, I just don't see the point in thinking or worrying about this at all.

 

[Helena]

China, Russia and Brazil want to stop using the US Dollar as the world's reserve currency...

How sweet, China has a Russian bride...
or maybe "bride" is too polite a term.

Russia will be raped of its natural resources...
China and Russian oligarchs will profit.

What does Brazil get out of the deal ?


.

 

[smurphy1]

For someone else to become a reserve currency they need two things: 1) one of the largest economy in the world 2) the desire to be a net importer. Right now only the US fits that description and China is actively fighting the second requirement. In the next 50 years only China or India could possibly challenge the US as the reserve currency.

But so what? The US doesn't need reserve currency status at all. It would get along just fine without it. It's nice to have because they are sending us cars, tvs, and ipods and all we send them are bits of paper (obviously they don't get physical paper, most of the dollars just exist on bank ledgers). If some other currency takes over as reserve currency then that would just mean the US would import less, export more and produce more goods domestically. This would actually be a benefit to the domestic economy resulting in more jobs and more domestic growth.

None of this would have a big effect on retirement planning as a whole but it may have negative effects on some industries or geographic investment markets so diversify, diversify, diversify.

 

[nash031]

The thought that the Yuan will replace the dollar is preposterous to me. Most people that bring up the strengthing Chinese economy as a reason also cite the fact that the US economy/dollar is being propped up by supportive fiscal policies (the mythical "printing money"). Meanwhile, those folks ignore the fact that no other currency or economy in the world is as artificially inflated as the Chinese right now.

In the 90s, Japan was going to supplant the US.
In the 00s, it was the Euro.

Through two different recent global economic "crises" of varying proportions (not even going back 20 years, mind you!), the US has remained stalwart. It won't always be that way, but I am betting that it will be for as long as it matters to my personal finances. The people that are telling everyone differently have a vested interest in you believing so.

 

[HFWR]

My main concern, having more to do with past FRB policy, as well as fiscal policy, is that "we" have pumped up the economy by running huge deficits and using "inaccurate" monetary policy, so actually allowing the economy to find an equilibrium free from fiscal and monetary shenanigans will be difficult, assuming anyone actually tries. We've painted ourselves into a corner...

Lots of unknowns for a very small fish like me, so other than a passing interest in economics, I stick to my knitting with low-cost index funds, and an allocation I think/hope I can live with through thick/thin and also which will provide a reasonable SWR.