Why the worries about interest rates?

[Dtail]

Quote:

Originally Posted by ShokWaveRider Me too.

Me three even if temporary just to lock in those higher rates.

[Koolau]

No expert, but isn't the FED primarily there to "manage" inflation? They have few tools - raising rates being (IIRC) the primary one. Pumping or not pumping liquidity by printing (or not printing) is the other tool as I recall. Don't we have inflation? It would make sense the FED would do what the FED does when inflation begins to emerge. Also (in theory) the FED isn't primarily concerned with stock prices - "in theory." Just sayin' as YMMV. I agree that the market is trying to cow the FED into NOT using its tools. It's the inmates running the asylum - again.

[UnrealizedPotential]

My understanding is that tapering is the first step towards a rate hike and that takes a while to play out in the market and then comes the rate hikes. But the stock market is forward looking and so anticipates slower growth. When factoring in tapering and rate hikes and its effect on the market a correction can occur in this scenario.

When one adds the rich valuation in stocks and the growing calls for a correction that is overdue, investors can get nervous. But to me , the worry about interest rates increasing means capital costs increasing which means slower growth.

[Markola]

Quote:

Originally Posted by Koolau No expert, but isn't the FED primarily there to "manage" inflation? .

Inflation has been a prominent focus in recent decades but the Fed was created to protect banks from their own greed and stupidity, and thus the rest of us. It keeps keeps the financial system liquid and loaning to the rest of the economy, keeping us in business through the natural economic cycles. It protects democracy by shaving off the harshest edges of an untrammeled, unregulated free market capitalist system, which, before regulation, was regularly so harsh to average voters’ lives in various panics and depressions that the public might have been susceptible to voting in some kind of totalitarian, fully-planned economy, and other disasters.

[ownyourfuture]

Very interesting thread.

Here's a related question.
When I bought my first home on July 1, 1994, a 30 year fixed was 9.25%
adjustable 6.25%.

I had zero real estate experience up to that point. Every single person I asked told me to lock in the 9.25%. Luckily, I went full on contrarian & chose the adjustable.

Someone can correct me if I'm wrong, but if memory serves, the economy was doing just fine.

Why is it that 27 years later, with rates about 1/3 what they were then, do we have a federal reserve that seems terrified to raise interest rates a measly 25 basis points ?

What does that say about the underlying economy ?

[UnrealizedPotential]

Quote:

Originally Posted by ownyourfuture Very interesting thread. Here's a related question. When I bought my first home on July 1, 1994, a 30 year fixed was 9.25% adjustable 6.25%. I had zero real estate experience up to that point. Every single person I asked told me to lock in the 9.25%. Luckily, I went full on contrarian & chose the adjustable. Someone can correct me if I'm wrong, but if memory serves, the economy was doing just fine. Why is it that 27 years later, with rates about 1/3 what they were then, do we have a federal reserve that seems terrified to raise interest rates a measly 25 basis points ? What does that say about the underlying economy ?

My guess would be that the Fed is afraid of disrupting the economic recovery if it raises rates too far or too fast and especially too soon.

[VanWinkle]

Quote:

Originally Posted by ownyourfuture Very interesting thread. Here's a related question. When I bought my first home on July 1, 1994, a 30 year fixed was 9.25% adjustable 6.25%. I had zero real estate experience up to that point. Every single person I asked told me to lock in the 9.25%. Luckily, I went full on contrarian & chose the adjustable. Someone can correct me if I'm wrong, but if memory serves, the economy was doing just fine. Why is it that 27 years later, with rates about 1/3 what they were then, do we have a federal reserve that seems terrified to raise interest rates a measly 25 basis points ? What does that say about the underlying economy ?

It might say more about the national debt and keeping the cost of servicing
that debt at a low rate.

[ownyourfuture]

Quote:

Originally Posted by UnrealizedPotential My guess would be that the Fed is afraid of disrupting the economic recovery if it raises rates too far or too fast and especially too soon.

No disrespect, but it seems like we've been hearing that since 2008.

[UnrealizedPotential]

Quote:

Originally Posted by ownyourfuture No disrespect, but it seems like we've been hearing that since 2008.

Well I think there is another way to look at it. Some economists say that the economy never truly recovered from the recession during the 2007-2009 period. The Fed has repeatedly injected money into the economy to keep it afloat , only at times having to greatly increase it during periods like what happened in 2020 and up until today.

Now how does the Fed raise rates if it has to inject money into the system just to keep it going ? Will inflation force its hand to eventually try it anyway? I do not know. I think the Fed is rather limited in what it can do.

I think the stock market at some point will make that decision for us one way or the other.

[RetireeRobert]

Why the worries about interest rates?

Fed interest rate policy announcements tomorrow. Result--Stock market down 600+ today.

[aja8888]

Quote:

Originally Posted by RetireeRobert Why the worries about interest rates? Fed interest rate policy announcements tomorrow. Result--Stock market down 600+ today.

Great timing for the two FED bank chairs that announced they were selling their equities last week.

[RetireeRobert]

Quote:

Originally Posted by aja8888 Great timing for the two FED bank chairs that announced they were selling their equities last week.

Even the appearance of conflict is not good.

[triangle]

Quote:

Originally Posted by RetireeRobert Even the appearance of conflict is not good.

Regarding appearance of conflict, this article that caught my attention. It did not talk about Fed Chairman Jerome Powell's total net worth but included the statements:


"CNBC reported that "Powell held between $1.25 million and $2.5 million of municipal bonds in family trusts" which made up "just a small portion" of his total assets. These bonds were held last year when the Fed stepped into make more than $5 billion in muni purchases"


"It was additionally disclosed this week that Boston Fed President Eric Rosengren held between $151,000 and $800,000 in REITs that owned mortgage backed securities and that he made as many as 37 trades in the 4 REITS while the Fed was buying nearly $700 billion in mortgage backed securities"


https://www.zerohedge.com/markets/fe...ailed-out-2020

[all4j]

Quote:

Originally Posted by MichealKnight Why all of a sudden, we can't gradually go back to 2018 interest rates? Would love to hear any thoughts, thanks

I haven't noticed the angst you have noticed & since there are so many aspects, it would be hard to hit on same issues. There are 2 sides to these transaction -- ie lender & borrower, etc -- & perspectives will obviously differ accordingly. But here are some scattered thoughts.

It isn't so much about the destination (where rates end up -- for which there isn't consensus) as it is the journey to get there. How much trust is there that this will be done with minimal disruption? Will monetary policy & fiscal policy mesh well?

As for turning the clock back to 2018....Really harder than it may seem to do that. Comparing any 2 time periods gets complicated because you need to look at the entire picture -- not only in absolute numbers but direction. For example, housing inventory...same size? growing or shrinking? While CDs pay less interest, others have refinanced mortgages & extracted cash from their house, bought new furnishings...would that continue at same pace if rates changed overnight? If not, what impact is that?

What about tax policy? We saw a reduction in taxes & directionally a move to shift dollars from government to private sector (increase house price, stock price). Now direction (implemented or under discussion) is to reverse that. Changing from encouraging to discouraging capital formation. Will productivity & supply chains be basically the same as in 2018?

Fed intervention has had the effect of lowering the cost of risk. People are more apt to buy a house if a job seems stable. Stock prices are based on future earnings. Neither likes uncertainty. Portfolios may start to shift dollars away from equities & toward bonds -- which may be fine once settled, but where will new investment come from? Foreign dollars?

So, no pretense of being comprehensive. just sayin it ain't straight forward.

[Koolau]

Quote:

Originally Posted by aja8888 Great timing for the two FED bank chairs that announced they were selling their equities last week.

Quote:

Originally Posted by triangle Regarding appearance of conflict, this article that caught my attention. It did not talk about Fed Chairman Jerome Powell's total net worth but included the statements: "CNBC reported that "Powell held between $1.25 million and $2.5 million of municipal bonds in family trusts" which made up "just a small portion" of his total assets. These bonds were held last year when the Fed stepped into make more than $5 billion in muni purchases" "It was additionally disclosed this week that Boston Fed President Eric Rosengren held between $151,000 and $800,000 in REITs that owned mortgage backed securities and that he made as many as 37 trades in the 4 REITS while the Fed was buying nearly $700 billion in mortgage backed securities" https://www.zerohedge.com/markets/fe...ailed-out-2020

Let me be the first to say I'm shocked. SHOCKED! YMMV

[RetireeRobert]

Quote:

Originally Posted by Koolau Let me be the first to say I'm shocked. SHOCKED! YMMV

That is probably what some of the Fed officials said!

[cyber888]

Fed says they will increase rates a couple of times to 2024 .. Market responded positively today (Sept. 22, 2021 Wed). Dow closed +338 points and Nasdaq is up +150 points.

This goes to show interest rates increase is double edged - Feds raising interest rates due to Economic recovery was perceived as positive for the market. So, no temper tantrum today.