The Fed then provided free money to their Wall Street bank owners
with a Fed Funds rate of 0 % for the next 6 years.
The Fed's attention is now directed at establishing a safety margin
with the Fed funds rate well above zero so that it can cut rates when the next recession arrives.
Whatever difficulties stock selection strategies faced
with the Fed Funds rate at zero are likely to persist at 25 basis points.
My questions: how low do we go
with the Fed funds rate, and how much will price inflation run in the process?
During older times, the end of a Fed loosening cycle would end
with the Fed funds rate rising.
The London Interbank Offered Rate (LIBOR) is a short - term rate tied very closely
with Fed Funds rate, which is the overnight interbank lending rate in the US.
Rates on fixed mortgages — such as the 30 - year for purchases and the 15 - year for refinances — don't follow in lockstep
with the fed funds rate — it's actually tied more closely to the yield on the 10 - year Treasury note, which is also on the rise.
Alan Ruskin, Deutsche Bank Global Co-Head of G - 10 FX Strategy, says to not get too obsessed
with the Fed funds rate.
Not exact matches
For her part, Federal Reserve Chairwoman Janet Yellen said in June that the removal of the
Fed as a prop in October might not coincide
with an immediate increase in its federal
funds rate, which has hovered near zero since the financial crisis began.
«I don't see raising the target range for the
fed funds rate above its current low level in 2015 as being consistent
with the pursuit of the kind of labor market outcomes that we are charged
with delivering,» he said.
Though all measures of inflation were coming down as summer turned to fall and the economy clearly was slowing following a July brush
with $ 4 - a-gallon gasoline, the FOMC decided to hold the
fed funds rate at 2 %, concluding that «the downside risks to growth and the upside risks to inflation are both of significant concern to the committee.»
With the 10 - year yield (risk free
rate) at roughly 2.55 %, and the
Fed Funds rate at 1.5 % (two more 0.25 % hikes are expected in 2018), it's hard to see interest
rates declining much further.
Besides, the
Fed can't really monetize the debt
with a positive
Fed Funds rate target.
Additionally, the
Fed funds rate influences the prime
rate, the interest
rate awarded to bank customers
with the best credit, which is tied to various loans and savings account yields.
DR's simulations assume that last dot climbs in time to give the
Fed some height to drop from when the next downturn hits (importantly, he stresses that the neutral
funds rate is very likely lower than it used to be), but, as I argue in the piece,
with some evidence from market expectations of the
funds rate, I'm skeptical.
Historically, the
Fed has responded to recession by cutting
rates substantially,
with the benchmark
funds rate falling by 400 basis points or more in the context of downturns over the past two generations.
But it will be many, many years from now, and if we end up
with Volcker style
Fed fund rates before then — as you seem to believe — it won't be because the Treasury was trying to surreptitiously inflate away the national debt.
In fact, even
with this month's latest boost, the sixth, the
fed funds rate is still just 1 5/8 % (at its mid-point).
Interest
rates have continued to be pushed lower and lower and lower and most of this is because the
Fed keeps on adjusting that federal
fund's
rate and adjusting interest
rates down in the way that they do that is by putting cash into the market and buying back bonds or short - term bonds
with the federal
fund's
rate.
As
with Fed funds, reverse repo
rates, Interest on excess reserves, and LIBOR, the price of gold pings an important signal as to risk, the cost of capital, the state of the financial markets, and economic well - being in general.
The OCC's findings are consistent
with more recent surveys: The
Fed's October survey of senior U.S. loan officers found a growing number loosening standards for commercial and industrial loans, often by narrowing the spread between the interest
rate on the loan and the cost of
funds to the bank.
Many people are familiar
with the
FED's monetary policy responsibilities, including the FOMC meetings, Federal Funds Rate decisions, Fed Chair's press conference, as well as various unconventional polici
FED's monetary policy responsibilities, including the FOMC meetings, Federal
Funds Rate decisions,
Fed Chair's press conference, as well as various unconventional polici
Fed Chair's press conference, as well as various unconventional policies.
In keeping
with this added cautiousness, members of the FOMC revised down their median projections for the
Fed funds rate to 0.875 % by end - 2016 and 1.875 % by end - 2017, roughly equivalent to two hikes in 2016 (from four projected in December) and four in 2017, while keeping their economic forecast broadly unchanged.
Market prices in March
Fed move The week began
with markets pricing in about a 50 % chance of a hike in the federal
funds rate at the Federal Open Market Committee meeting this month but ended
with markets almost fully pricing in a quarter - percent hike.
The
Fed governor also made a comparison between the current unemployment and inflation
rates with the 2004 - 07 period, when the US economy was near full employment and inflation was higher than 2 percent, thereby making the point that policymakers should hold on to the current federal
funds rate and remain extremely cautious when it comes to raising it.
For an ETF investor
with exposure to 10 - year and longer - dated debt through
funds such as the iShares 7 - 10 Year Treasury Bond ETF (IEF A-51) and the iShares 20 + Year Treasury Bond ETF (TLT A-85), this period of quiet in the
fed funds rate looked like this for their portfolios:
And when
Fed funds are rising, the opposite happens —
funding rates for those clipping interest spreads rise, and the expectation of further rises gets built in, leading some to exit their trades into longer and riskier debts, which makes those yields rise as well,
with uncertain timing, but eventually it happens.
With the
FED being the dominant borrower (willing to borrow at higher
rates), banks, GSEs and money market
funds have less desire to provide short - term
funding for other entities, thus forcing them to borrow at the
rate set by the
FED.
With this as context does anyone believe that the
Fed raising the
Fed funds rate — a market that basically doesn't exist anymore — to 1.5 % will do anything to deter this nearly useless activity?
One more note: I believe gradualism is almost required in
Fed tightening cycles in the present environment — a lot more lending, financing, and derivatives trading gears off of short rates like three - month LIBOR, which correlates tightly with fed fun
Fed tightening cycles in the present environment — a lot more lending, financing, and derivatives trading gears off of short
rates like three - month LIBOR, which correlates tightly
with fed fun
fed funds.
With the lower band of the
Fed funds rate now at 1.25 %, it's likely to be trading near 2.0 % by the end of 2018.
The
Fed also indicated that it expects three more
rate escalations in 2018,
with a few more after that, making the long - term forecast for the federal
funds rate 2.75 %.
With a 2.00 %
Fed Funds rate, the 2 - year Treasury would be expected to yield between 2.25 % and 2.50 %.
This would test the resilience of the economic expansion, and if the economy keeps growing as long bonds rise in yield, then match the rises in long yields
with rises in the
Fed Funds rate.
When the
Fed «raises»
rates, what it alters is the Federal
Funds rate — the rate that banks charge each other for overnight loans to cover their cash needs (every bank is required to keep a certain amount of funds, called reserves, with the Federal Reserve and these funds can be borro
Funds rate — the
rate that banks charge each other for overnight loans to cover their cash needs (every bank is required to keep a certain amount of
funds, called reserves, with the Federal Reserve and these funds can be borro
funds, called reserves,
with the Federal Reserve and these
funds can be borro
funds can be borrowed).
The U.S. Treasuries gained Thursday, taking cues from the Federal Reserve's overnight decision, where the
Fed Funds rate remained unchanged,
with expectations of a slightly higher inflationary pressure.
According to the CME's FedWatch tool,
Fed Funds futures traders are pricing in about an 85 % chance of a
rate hike at the central bank's June meeting, so the scope for a recovery in the greenback may be limited, especially
with two more NFP reports and CPI readings ahead of that meeting.
In a floor system, banks are kept flush
with excess reserves, and monetary control is exercised, not be adjusting the quantity of reserves so as to achieve a particular equilibrium federal
funds rate, but by manipulating the interest
rate the
Fed pays on banks» required and excess reserves holdings, alone or along
with the
Fed's overnight reverse - repo (ON - RRP)
rate.
CDs currently compare poorly to the returns on other financial products, and
with the
Fed planning on a slow increase to the
funds rate over 2017, you may lose out from locking your money into a CD too early.
The
Fed's projected path of interest
rates shifted downward,
with the long - run federal
funds rate now seen at 3.5 percent, compared
with 3.75 percent at the last policy meeting.
Here we can see what happened
with the steepness of the yield curve and the
Fed Funds rate during the last
rate hikes in 2004 - 2006:
That is consistent
with the change in language in the statement, which left timing for any future hikes in the
Fed Funds rate vague, and subject to interpretation.
So far, those betting for tightening in the
Fed funds futures market have been losing over the last few years along
with those shorting the long Treasury bond, because
rates have to go up.
If the FOMC cut the
Fed funds rate to 3 %, that might normalize things, but for now they will be content
with half measures like temporary injections of liquidity.
Additionally, the
Fed funds rate influences the prime
rate, the interest
rate awarded to bank customers
with the best credit, which is tied to various loans and savings account yields.
Far better to let small recessions do their work, and leave the
Fed funds rate high until marginal investments are repriced,
with the attendant bankruptcies.
The
Fed raised
rates again in March
with the target
Fed Funds rate now at 0.75 - 1.0 %.
Yields have been on an upward march since Donald Trump's election, and
with a likely hike to the
Fed funds rate coming in March, that trajectory is expected to continue.
For those who prefer pictures to numbers, the chart shows the S&P 500 and the
Fed Funds rate monthly since 1954
with recessions marked by the vertical lines.
That action led many investors to believe the
Fed would follow with more fed - funds hikes that would ultimately lead to higher bond rates as we
Fed would follow
with more
fed - funds hikes that would ultimately lead to higher bond rates as we
fed -
funds hikes that would ultimately lead to higher bond
rates as well.