Ho long should the FED keep rates at near zero?

[GTaudiophile]

The USD continues to weaken today following the news that the FED will continue to keep rates near zero. The EUR has advanced from 1.44 to 1.47 just in the past couple of days. Speaking of Europe, they have inflation fears, so the ECB recently raised rates.

Should we be following their lead? Does no one remember that cheap capital is partly what got us into this mess? Why do we in the US seemingly turn a blind eye to obvious inflationary pressures?

 

[Anarchist420]

They should keep deflating and never turn back.

 

[drebo]

The US doesn't have inflation, remember? We're teetering on the cusp of hyperdeflation.

 

[GTaudiophile]

The US doesn't have inflation, remember? We're teetering on the cusp of hyperdeflation.

In every respect besides salaries, right?

 

[Anarchist420]

The US doesn't have inflation, remember? We're teetering on the cusp of hyperdeflation.

I left out the key word "should". According to shadow govt stats, prices have risen 10%, even if the Fed would like people to believe it's only 2%.

they should contract the credit supply.

 

[ElFenix]

long term mortgage rates are fairly well disconnected from the overnight rates the fed charges banks.

 

[EagleKeeper]

It was cheap captial for housing that dug this mess.

If they raise rates, those industries trying to recover. against weak demand, that need to borrow may be squeezed tighter. Added costs against uncertainity of the marketplace.

We (economy) flew off a cliff; it takes a lot of effort to climb back to the top; adding stones to ones legs only makes the climb tougher.

 

[piasabird]

It is not really the interest rate that causes inflation. It is running up the deficeit too high too fast that causes the US $$$ rate of exchange to fall that is the problem. When that happens, the rate on rare metal like gold and Oil rises. So when you go to the store it takes more $$$ to buy things like eggs and milk.

What the Interest rate on borrowing being that low does is it makes it easier to borrow more money that people can not pay back. Of course if you have a house loan with a fixed rate that is not affected by the interest rate fluctuating. Usually when people borrow money with variable rate loans, that is what causes the problem.

The real problem is we can no longer lower the interest rate to ease up on the economic forces. Also if we increase the interest rate it will make running a business costs increase. But we really need the interest rate higher around 4% to help investors be able to make some money. If investors could make more money, then that would help people who are retiring be able to make more money on fixed incomes and people going into retirement, who want to make money on their nest egg.

Raising the interest rate too fast is another thing that could cause inflation. But a low interest rate could cause the exact opposite if things become too easy to buy. The housing interest rate use to be 2 points above prime. So you could say the long-term real estate interest rates are currently too high. If the Fed interest rates are about zero, then maybe the real estate rate should be 2%! So maybe to a point real estate rates are disconnected or our current Fed interest rates should be a little higher. Why should businesses and banks get such a good deal and the cunsumer is hung out to dry???? They are not passing along their discount rate to the consumer, they are just putting it in their pocket.

 

[brencat]

Raising the interest rate too fast is another thing that could cause inflation. But a low interest rate could cause the exact opposite if things become too easy to buy. The housing interest rate use to be 2 points above prime. So you could say the long-term real estate interest rates are currently too high. If the Fed interest rates are about zero, then maybe the real estate rate should be 2%! So maybe to a point real estate rates are disconnected or our current Fed interest rates should be a little higher. Why should businesses and banks get such a good deal and the cunsumer is hung out to dry???? They are not passing along their discount rate to the consumer, they are just putting it in their pocket.

Raising rates too fast causes a contraction in money supply which is deflationary. The Fed is keeping money cheap in the hopes of inflating our way out of a potentially deflationary environment (overhang of housing supply, huge slack in the labor market), but all it's really doing is creating stock market wealth (read: a 3rd bubble). If you are a retiree on a fixed income, or unemployed, you are getting killed right now as inflation erodes the value of your retiree bond portfolio, while paying a lot more at the store and gas pump. But it's happy times if you are in finance or work on Wall St. as equities make new highs.

But I agree with you that I think cheap money is the root cause of all our problems in the last 5-7 years.

Lastly, mortgage rates will never be 2%. Fixed rate mortgages are based off the UST 10yr which closed 3.36% today. Only variable rate mortgages are based off a spread to 1yr Libor or similar floating rate metric. BTW, the prime rate is FF + 3%...so 3.25%.

 

[drebo]

The stock market is definitely in a bubble right now. There's no way we've recovered to 2007 levels.

 

[bradley]

The FED funds rate will raise when the elderly run low on savings. Right now near-zero interest rates are chasing everyone into a speculative stock bubble.

 

[GTaudiophile]

Raising rates too fast causes a contraction in money supply which is deflationary. The Fed is keeping money cheap in the hopes of inflating our way out of a potentially deflationary environment (overhang of housing supply, huge slack in the labor market), but all it's really doing is creating stock market wealth (read: a 3rd bubble). If you are a retiree on a fixed income, or unemployed, you are getting killed right now as inflation erodes the value of your retiree bond portfolio, while paying a lot more at the store and gas pump. But it's happy times if you are in finance or work on Wall St. as equities make new highs.

But I agree with you that I think cheap money is the root cause of all our problems in the last 5-7 years.

Lastly, mortgage rates will never be 2%. Fixed rate mortgages are based off the UST 10yr which closed 3.36% today. Only variable rate mortgages are based off a spread to 1yr Libor or similar floating rate metric. BTW, the prime rate is FF + 3%...so 3.25%.

Well put. Thanks.

So once again the bankers in charge (Ben, Tim, etc.) are doing all this for their buddies instead of sound financial policy?

 

[LegendKiller]

Well put. Thanks.

So once again the bankers in charge (Ben, Tim, etc.) are doing all this for their buddies instead of sound financial policy?

You might want to check the other thread out to understand exactly what's going on. This goes far beyond the 1st order effects of the US economy.

As far as mortgages being based off of the 10yr, that's false. They are based on the current spreads of MBS.

 

[Doppel]

Until the guys who pay the lobbyists make enough money. How much is enough, you ask? More than they have now.

 

[dullard]

1) Inflation has been nearly non-existant for the last 2 years. It is ticking up slightly, but it really isn't bad yet at 2.7% (historical average is 3.4%). Inflation was 5.6% in mid-2008, were you complaining about the 2.0% fed rate then? I don't recall, so this is an honest question.

2) Inflation and the federal funds rate are only loosely related. The most recent data was 2.7% inflation with the fed rate near 0%. Back in 2007 the inflation at or near 2.7% for nearly the entire year. But the fed rate was 5.25%. How about 2001, 2.7% inflation and ~3.75% fed rate (the fed was cutting rates nearly every month in 2001). Same inflation, three massively different federal funds rates. You can't honestly think that raising the fed rate will necessarilly do anything to the inflation rate.

3) There are just too many other factors in a global world economy (where it is the rate of all countries that matter, not just one country). For example, for several years my US mortgage was based upon the average of European central bank rates. Or another example: an international corporation can borrow money from many different countries, it's spending isn't tied to our rate any longer.

4) Inflation is a minor annoyance. Deflation and a bad economy are major problems. Thus the Fed and I would both rather err on the side of inflation. Heck, as pointed out by a poster above, inflation helps many of our problems (debt becomes less and less meaningful for example). Of course, taken to an extreme, inflation is bad. But we are no where near an extreme.

But, you are correct, rates have to go up from here. GDP is growing, unemployment is coming down, there is no reason to keep the fed rate near 0%. Historically the fed refuses to do anything in an election year. Thus 2012 is off the table. We either need to raise rates now or wait until 2013. Waiting until 2013 is probably too long and too inflationary. The fed should act now, but act slowly (raise it to say 1.5% by the end of this year and keep it there throughout 2012).

 

[masteryoda34]

Until the price of gold in USD is greater than the Dow index.

 

[dullard]

The stock market is definitely in a bubble right now. There's no way we've recovered to 2007 levels.

Why do you say that? Here is some data:

2011, 1st quarter GDP: $13.4T
2007, 1st quarter GDP: $13.1T

GDP is higher now than in 2007 (or any time ever in our history). Basically the same 500 companies in the S&P now get a share of a bigger GDP. So, they should be doing better.

2011, 1st quarter GDP growth: 1.8%
2007, 1st quarter GDP growth: 0.9%

Again, 2011 looks better.

2011, average growth rate for the last 4 quarters: 2.3%.
2007, average growth rate for the last 4 quarters: 1.3%.

Again, 2011 looks better than 2007.

Apr 29 2011, $/Euro: 1.48
Apr 29 2007, $/Euro: 1.37

Slight lead for 2007.

The only statistic where 2007 was really leading is unemployment: 4.4% vs 8.8%. But, 2007 was on the way into the recession (GDP growth was nearly negative starting in 2006) and 2011 is the way out of the recession. Stock markets are forward looking. In 2007 the housing bubble was massive and was popping. Same with the stock bubble, it was massive and people found that we were standing on very fragile ground.

The stocks are going up, not down as in Apr 2007 because virtually all stats are improving now. They were all getting worse then.

 

[masteryoda34]

Why do you say that? Here is some data:

2011, 1st quarter GDP: $13.4T
2007, 1st quarter GDP: $13.1T

Inflation adjusted?

 

[drebo]

Inflation adjusted?

Probably not.

 

[Doppel]

Inflation adjusted?

Does it matter? Stocks are denominated in inflation-impacted currency.

 

[LegendKiller]

Probably not.

Why do you opine on shit you have no idea about?

It's doofs like you that make this country more stupid than it already is by running around the internet saying shit like this.

Real GDP is real GDP, inflation adjusted, which is the only number that's used by the news and in official releases.

Inflation hasn't been all that bad either way. Shadowstat's numbers are bullshit.

 

[masteryoda34]

Does it matter? Stocks are denominated in inflation-impacted currency.

Yes, I think it does matter. I also would argue that GDP per capita in constant dollars is a better metric for assessing economic health than gross GDP.