The Fed

Fed To Raise Interest Rates

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FINALLY! – That’s what your average Federal Reserve Board member is thinking on this fine Friday. The Fed has been almost dying to raise interest rates for over a year now. They projected in December 2015 that there would be multiple rate hikes coming in 2016, but it seemed every time they got ready to raise rates, some economic shakeup would pop up and force them to wait. Until, finally, in December of 2016, they got to raise interest rates, but only once. Interest Rates in 2017 The Fed did just get a rate hike a few months ago, but it wants more. It needs more. No one is really sure why, since the supposed target of 2.0% for inflation is still not being hit. See my review of Acorns app. But, today’s job report shows a lower unemployment rate, and an economy that added 235,000 jobs. Even bigger news is wages rose 6 cents in February, after rising 5 cents in January, which means that the labor market is finally, after years of sluggish, iffy growth, on solid ground. And so… the Rate Hike cometh! Futures markets are pricing in a near 90% certainty of an interest rate hike next …

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Fed Wants To Hike Rates

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The Federal Reserve Open Market committee wants to hike interest rates so bad they can taste it. Realistically, the Fed has been dying all year to raise interest rates, it’s just that every time it was ready, something drastic happened to spook the Fed, the economy, and the markets enough to make it impossible. But, there has been a period of relatively basic news, and no big shocks, so now it’s basically, “Quick! Raise rates before something else happens.” I’m no economist, but the Fed’s supposed goals are full employment and 2% inflation. This makes the rush to raise interest rates kind of strange, since, the economy is nowhere near full employment, and inflation is nowhere near 2 percent either. I guess the Fed believes that the crawling, sputtering, stuck in neutral expansion that numerous analysts are actually worried is coming to an end, will fire up and take off before the Fed can act. Yeah, that doesn’t make any sense to me either. Which brings us to a Fed rate hike in December because they feel like it makes them look tough, or diligent, or something. What Happens When the Fed Raises Rates I should probably crank out a full article about …

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Interest Rate Hike in September?

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Here we go again. Last year, the Federal Reserve, desperate to get away from zero interest rates, raised its target benchmark interest rate from 0% to 0.25%. They proudly crowed about fighting inflation and predicted several rate hikes in 2016. Then, January happened. If you don’t remember, China’s economy had a freak out before the country’s masters could get it under control. Understandably, with the instability, the Fed backed off of its next interest rate hike, but still predicted more this year. And, then… and then… With the days of the year running out, the Fed, again desperate to raise interest rates despite inflation being nowhere near the supposed “target,” was planning a Summer increase but… The jobs report didn’t cooperate. And then… The jobs report didn’t cooperate. Oh, and there is more news of the economy being very, very sluggish. It almost seems as if the economy just isn’t that strong and stable, and that inflation is low, and that the smart thing to do is just leave interest rates alone. But, nobody wants to do that. They want to be HAWKS. Hawks fight inflation fast and hard, even when it isn’t there. And so, here we are. This …

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Fed Telegraphs Slower Rate Hikes

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The Federal Reserve, via its members, is out announcing that the rate hikes everyone was sure were coming this year, after the December interest rate increase are, in fact, on hold, until the markets and the economy stop being so shaky. Fed Members Nudge Wall Street Off of Hike Forecasts The St. Louis Fed President, James Bullard, said in an interview that rate hikes during 2016 were never a sure thing. He is right that the Fed often, and deliberately, said that rate hikes were dependent upon data going forward, but the markets didn’t believe them, pricing in a full 1% interest rate hike over 2016, and every analyst under the sun talking about a steady march up in interest rates. Bullard blames the previous Fed under Fed Chairman Bernanke for “mechanically” raising interest rates 17 straight times from 2004 to 2006 (and likely triggering the nationwide real estate slump that ended up all but crashing the U.S. banking system in 2007). He says that because of that chain of increases, everyone simply assumed that this year would have similar, albeit slower, rate increases. Bullard leaves out that many of the other current Fed members (including himself) could say often enough …

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Fed Does Not Raise Rates Market Confused

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So, this is interesting. The Federal Reserve did not raise interest rates at its September (2015) meeting. This is not surprising, per se. There were numerous international banks and organizations, plus tons of U.S. economists who worried that an increase would be too soon for a fragile economy. Here is where it gets weird. The stock market LOVES to plunge in reaction to a rate increase. Sure, it only lasts a day or two, but there’s nothing quite as fulfilling to a stock market index as dropping 200 or 300 points whenever the Fed raises interest rates. The catch is that Wall Street actually secretly loves interest rate hikes. A Federal Reserve increasing interest rates is the equivalent of a stern father taking away our credit card for our own good. The market throws a temper tantrum, of course, but it’s better for everyone in the long term. If the Fed raises interest rates, then there won’t be an inflation boogeyman. Based on all the pundits and analysts out there, it sure seems like the stock market was expecting a rate increase and all ready to throw its fit and wring its hand, probably just until the weekend, but still. …

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Stock Market Down On Jobs

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The Dow Jones Industrial Average is down about 300 points right now because of a good jobs report. As the main character in one of my daughter’s shows says, “What the huh?” Jobs Good, Rates Rise? No one thing seems to move the stock market more regularly than the jobs report. As always, this new report is actually about last month. After all, it takes some time to collect and calculate the data. What makes this particular jobs report so important is its timing. The Federal Reserve Board is scheduled to meet in September. The Fed has expressed a willingness, if not a desire, to raise interest rates this year if the economy is doing well enough. Everything looked pretty good for a rate increase in September, but then the whole China market blowup thing happened and with it, the U.S. stock market took a hit, and the idea of a rate hike got a little more iffy. But, with a good jobs report, the rate hike is back on the table… maybe. You see, the jobs report was good, but not good enough to make this a no brainer. Jobs were created, but well below the 200,000 that would be …

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What Happens When The Fed Raises Interest Rates?

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There has been a lot of talk recently about the Federal Reserve raising interest rates. First, remember that the Federal Reserve only actually sets interest rates for banks. Specifically, the Fed sets two interest rates. The first interest rate, called the Discount Rate, is the interest rate the Fed charges banks for an overnight loan. The second rate is called the target rate, and this is the interest rate the Fed tries to achieve via the open market operations. Since the monetary crisis that started off the Great Recession, the Federal Reserve’s target interest rate has essentially been zero. The purpose of such a rate is to make it more worthwhile for banks to lend money. The idea is that more money in the economy stimulates additional growth. The economy is still growing very slowly, but it is still growing, which brings us to raising interest rates. Interest Rates Growth and Inflation In physics, basic equations come with the caveat that they are true, on a friction-less plane, in a vacuum. In other words, if there is no gravity or wind resistance. Such calculations are useful for understanding concepts, but would be devastatingly inaccurate for use in the real world. …

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Is The Economy Good or Bad?

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I occasionally get questions regarding the economy that sound frustrated in the inability to get a clear answer. That is understandable. The U.S. economy is getting better, but it isn’t really getting better fast enough for anyone to be able to benefit from the fact that it is getting better. Add in the fact that many news outlets have gone partisan and that their reporting is designed more to highlight certain aspects that make their guys look good and the other guys look bad, and you get a confusing picture about whether the economy is good or bad right now. Doesn’t make much sense does it? To really understand what is going on economically, it may help to read an article from The Economist. As an aside, whenever you really want a reasonable idea of what is happening in the U.S. it can be helpful to read non-U.S. publications such as The Economist, and to a lesser extent, the Guardian. The Economist leans toward the conservative side, but that doesn’t mean the same thing as it does here in the U.S. More specifically, the publication does not have an owner or readership with a dog in the hunt, so to speak, …

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Unemployment Hits 7% for November

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Unemployment numbers for November were released today. The unemployment rate hit 7.0 percent for the first time since November 2008. If your recent economic history is a little fuzzy, that’s right about the time the banking crisis and housing market implosion was a full tilt. In other words, we’ve been over seven percent unemployment since the so-called Great Recession started. I get  a lot of questions about economic news stories. In particular, people want to understand the significance of the various economic statistics that come out better so that they can separate real new from hyperbole. So, let’s take a look at these unemployment numbers and see what the deal is. What Is the Unemployment Range? First, off, it can be hard to overstate how important unemployment (or more accurately, employment) is to the overall well being of the economy. I’ve covered before what makes unemployment numbers so important, so we’ll leave that out for today and focus instead on what is going on here, and why it matters so much. One question I get from time to time is why people get so excited over small movements in the numbers. That’s a good question. It can help to have …

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Fed Keeping Interest Rates Low

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In an announcement that comes as no surprise, in large part because it has been repeatedly telegraphed by the the Fed itself, the Federal Reserve Board on voted on Tuesday to leave interest rates at their current near zero rates. The Fed further reiterated its commitment to doing so for the near future, pledging to keep rates low through at least the middle of 2013. There are several interesting implications for investors and consumers in the Federal Reserve’s actions and statements today. First, as mortgage lending continues to languish and be a rather slow and dour corner of finance, homeowners should take solace in the fact that there is no rush. While there is no guarantee rates will stay exactly as low as they are, the Fed’s continued commitment to low interest rates means that neither new mortgage interest rates or adjustable mortgage rates are going up any time soon. Second, the Fed announced that it would continue to implements the so-called “twist” in which the Federal Reserve is moving its short-term bond holdings to longer-term bond holdings in an effort to bring down long-term interest rates. Longer term rates are traditionally less influenced by the Fed, which sets only the short-term …

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