Ok...I know the Fed didn't raise rates at their last meeting. But I need some help with how we got where we are. Long term rates aren't rising. It appears the economy is headed for a downturn. Credit card companies are reporting late payments are increasing nearly every month...and the higher interest rates can't be helping that. So what is the Fed thinking? Why did they raise short term interest rates for sooooooo long. I know the concerns about inflation...WHAT INFLATION?? If we had inflation as a result of higher oil prices, that would be one thing. But when you start to see downturns in leading indicators....which have been around a little while now....why keep up rate hikes on short term interest?? I don't get it. I need someone smarter than me to explain...shouldn't be too hard!
The downturn in the housing market has a lot to do with it... *Steps backwards slowly, looking around, hoping the **** he just threw up there means something.*
huh? the downturn in the housing market is a reason NOT to raise interest rates. i understand they didn't raise rates the last time. but that was preceded by years of rate hikes that i don't understand. it seems to me as if the fed exacerbated the problem with all of those rate hikes.
You make a valid argument, sir. However, I think they were trying to avoid popping the housing bubble, byslowing the housing markets, and therefore, in summation, I say...uhh.*sweating* NOW IMAGINE THE LITTLE GIRL WAS WHITE!
But seriously, the only thing I know about interest rates was what you already mentioned... discourage borrowing, the fear of inflation, or whatever.
The rates are at historical lows. With that indicator, consumers and investors have assumed that money is cheaply available. In a sense, the rates are doing what the Fed intended. Higher rates (if the banks will follow) will give people more incentive to save. At the very least, it'll make them charge and spend less. Like Achilles mentioned, the rate hike was to give an opportunity for a soft landing in the housing market. Borrowing conditions were insane such as 0 money down, variable rate mortgages or option ARMs that added unpaid interest onto the principal. At this phase, speculators have a huge influence on the type of landing. When Bernanke took over, many expected him to raise the interest rate in order to cool down the housing market in order for a softer landing before a correction became violent. Another reason is that the Fed's primary weapon to influence the macro economy is the discount rate they use to lend other banks money, and the federal funds rate their banks use for overnight loans. The federal funds rate is already at a very low level. There's not much room to wiggle if another recession hits. So you can also take the hike as a rate correction to a rate that shouldn't be this low. An arbitrary hike could set off a panic, or it could undo whatever his predecessor did.... High gas prices encourage inflation. It's a very important factor. During the oil embargoes of the 70s, high gas prices created an inflated market with no rise in real value. There were fears this would happen when prices were hitting 50....70 a barrel. This situation (pricey oil with low rate of inflation) hasn't happened before. Some guesses that inflation has been curbed are that the demand market met current supply instead of like before where the supply was artificially reduced. Another possibility is that cheap consumer exports from China and India allowed American consumers to spend more with the available money they had. The middle class didn't see wage increases. OTOH, they saw price decreases in luxury goods. Around the developed world, rates from national banks were generally low. Japan had a 0% lending rate up until recently. There was a lot of investment and trading into other markets using cheap converted currency. Housing booms have also been experienced elsewhere. Just like our home market, spending was high and borrowing was cheap. This wasn't sustainable in both situations, domestic and international. America's economy has recently begun to feel the effects of pricey oil. Possibly from higher mortgage rate increases. Again, the middle class hasn't seen significant wage increases in the past 10 years. I heard an analyst claim that 1/2 the home equity of Americans hasn't been tapped yet, but are people really that stupid to borrow more against their homes just to buy more unneeded crap? Who knows.... China has also been overproducing and overbuilding. They have a lot of cheap money with an undervalued currency and their banking system has some haphazard lending practices. As our economy cools down, they will be hit as well. Knowing that their growth was unsustainable, they should've enacted plans to cool their economy in the first place.... A downturn was expected. Nobody knew when, and nobody knows how hard.
thanks, IF!!! it just seems to me the fed was a little too aggressive with rate increases. and i can't find anyone getting paid to know more than me about it who disagrees.
Yeah, it's like OPEC in that oil thread. There's a general idea, but they might not know what they're really doing.
i'm behind on my book reading...young kids keep me from it! the astros aren't helping, either. (which i'm fine with!!!)
Raising rates is a preemptive thing - you have to project out 6-12 months, so there's no perfect solution. Go too little and inflation will get out of control. Go too far and the economy will slow too much. But most early indications so far is that they might actually have gotten it mostly right (which rarely ever happens).
Ever since the late 80s/90s, the fed's actually been pretty spot on in its moves. During the stagflation created by the oil embargo by OPEC, Paul Voelcker actually got us out of it, when logically none of the Fed's tools can actually affect the inflation/unemployment combo of stagflation. They broke a time-honored rule which stated that if the economy hit 4% GDP growth, you would raise rates. Greenspan gambled and refused to raise rates and it paid off because massive productivity gains from IT checked back most of the inflation concerns. Also, when we had the Russian debt default crisis, the Fed was pretty smart and temporarily lowered rates to flood the market with money in order to provide a small safety net. And we got through the 2001 recession and now gotten past a potentially disastrous housing collapse. The Fed historically has just been flat out stupid, but in recent years they've made some big strides and some good moves.
Another factor, if you don't raise rates when things are relatively good, you don't have any leeway to lower rates as a stimlus when times are bad. The latest period of low rates has put a massive infusion of value into the housing sector. Virtually anyone who has a non minimum wage job could have bought a house. The problem is we are spending all of it on crap and still running a deficit. I mean at the federal level all the money is being spent on wars and debt service. In good times you'd think you would get a lot of infrastructure and social improvments. I will say though , I think Harris County is doing a pretty good job with their windfall. Without an internet stock bubble, or a housing bubble where will the US get the cash infusion it needs to service the deficit? Service economies don't really create value and walmart wages don't pay taxes.
Paid economic experts? Man what a gig! Maybe I should apply for the job. After all, I do own a lucky 12 sided dice.
Combine the greatest amount of government debt ever with the following quote from the new Fed chairman, Ben Bernanke, and you might get some idea of a plan: (source) [rquoter] people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation. [/rquoter]
Fed has overdone it. The housing market is the reason they raised interest rates. Last cycle it was technology stock boom, Fed raised interest rates to blow it out. This cycle it is about housing market and commodity market boom, Fed raised interest rates bring it down. An ever rising housing market is not a healthy thing. It makes people think they have more assets than they actually do. It makes people overspend. The problem with Fed is they tend to overdo rate hikes. So when they pause rate hikes, market will keep going down and they are usually late on rate cutting. Last cycle when they paused rate hike, NASDAQ nosedove for 6 month before they started cutting rate. Now they are playing number game with the housing market in order to avoid a hardlanding. Notice what the initial new home sales # for July was? 1078K. What is the revised number issued today? 1009K. And the estimate of new home sales for Augest came out 1050K. If you believe that tells you a sharp increase of home sale in Augest, you are fool. They are gonna revise the number again next month. I expect it to be below 1000k.
