Fed raising interest rates 0.25% and setting a goal of "normal" 2% by 2018 means little to nothing. Market already priced the miniscule rate hike in as the move was widely expected, and move did nothing to assure markets that the Fed is in control, or set credible, measurable goals for future hikes.<p>Fed can continue to push on the supply side of money at the bank/institutional level all it wants. We need the Federal government to stimulate aggregate demand at the consumer level. How? Investing tax dollars in a smarter manner. Not raising the interest paid out on short term bonds so that institutions are incentivized to keep even more money in bonds rather than putting them to work in the economy.<p>Monetary policy needs to work hand in hand w/ fiscal policy. I feel bad for the Fed...its decisions are largely restricted and inconsequential when gov spending is broken, yet it receives all the attention and the blame.
Analysis from TD on how banks (Wells Fargo, US Bankcorp, JPMorgan, M&T, PNC, Citi) rushed to hike the prime rate to 3.50%, and forgot to increase the deposit rate:<p>As CNBC reported [1], "a change in the federal funds rate will have no impact on the interest rates on existing fixed-rate mortgage and other fixed-rate consumer loans, a Wells Fargo representative told CNBC. Existing home equity lines of credit, credit cards and other consumer loans with variable interest rates tied to the prime rate will be impacted if the prime rate rises, the person said."<p>The good news: the rates on mortgages, auto loans or college tuition aren't expected to jump anytime soon, according to AP, although in time those will rise as well unless the long-end of the curve flattens even more than the 25 bps increase on the short end.<p>What about the other end of the question: the interest banks pay on deposits? Well, no rush there:<p>"We won't automatically change deposit rates because they aren't tied directly to the prime," a JPMorgan Chase spokesperson told CNBC. "We'll continue to monitor the market to make sure we stay competitive."<p>Bottom line: for those who carry a balance on their credit cards, their interest payment is about to increase. Meanwhile, those who have savings at US banks, please don't hold your breath to see any increase on the meager interest said deposits earn: after all banks are still flooded with about $2.5 trillion in excess reserves, which means that the last thing banks care about is being competitive when attracting deposits.<p>[1] <a href="http://www.cnbc.com/2015/12/16/wells-fargo-bank-announced-wednesday-it-would-increase-its-prime-rate-to-35-percent.html" rel="nofollow">http://www.cnbc.com/2015/12/16/wells-fargo-bank-announced-we...</a>
Nanex, an account that follow market micro-structure, had an interesting tweet that showed how the liquidity on 10 year Treasuries just dried up prior to the announcement.<p><a href="https://twitter.com/nanexllc/status/677202959030083584" rel="nofollow">https://twitter.com/nanexllc/status/677202959030083584</a><p>I'm surprised this story has gotten so many votes so fast. This rate hike was widely predicted, as intentionally as the fed could by law so that they don't impact the markets too much.<p>Alot of people think this is the first of a few small rate hikes we'll see in the next 12 months.<p>IMHO, this is good news for the US economy,<p>- it will help give the the fed some wiggle room/ammunition to soften the fall when the next recession hits<p>- a slowly raising rate could stimulate the economy by convincing companies to spend now on large projects rather than wait, ditto for housing/consumers<p>Having said all that, keep in mind the rate hike is only 0.25% upping the overnight rate to 0.3% so this is likely to have an almost negligible impact on the every day consumer.
This could have wide implications for the startup community. A lot of people think that the current really high late-stage startup valuations, and the money pouring into the seed stage is an effect of the low interest rates. With no way to get any decent yields with these rates; it incentivizes institutional money to chase returns in alternative investment classes.
Curious if anyone knows what is the average VC fund return for the time-span of 2010-2015 for the past five years?<p>Suppose if Fed plan to gradually raise interest rates to 2.0% to 2016 year's end; and with that corporate investment bonds, municipal bonds yield also rising to match and go beyond that baseline.<p>Then, how attractive would VC funds be for mutual and pension funds in relation to other investment alternatives: a) bonds, b) publicly-traded companies following general market trends, c) REITs, d) commodities and precious metals?<p>For comparison, major Internet IPO's since inception:<p>GRPN (-87.97%)<p>TWTR (-42.23%)<p>FB (+176.6%)<p>BABA (-10.02%)<p>ETF Tracking since ETF inception:<p>SOCL (ETF for Global X Social Media) (-38.8%) vs. SPY (+62.93%) vs.TLT (+1.85%);<p>FDN (ETF for DJIA Internet Fund, but distorted to contain established Internet companies; GOOG) (+267%) vs. SPY(+65.62%) vs. TLT (+44.18%)
This will have an impact on the flow of money to VC's, which will have an impact on the flow of burnable cash to unprofitable startups. No more $1.5 million rounds for apps like Yo [1] (the investor community should be embarrassed and horrified that this kind of thing was getting financed anyway).<p>Winter is indeed coming for those that don't have a business model, and that's a good thing.<p>[1] <a href="http://www.businessinsider.com/yo-raises-15-million-at-a-5-10-million-valuation-2014-7" rel="nofollow">http://www.businessinsider.com/yo-raises-15-million-at-a-5-1...</a>
This was very much in line with expectations, ergo the muted reaction in the markets. It's worth noting that the Fed used <i>gradual</i> in lieu of <i>measured</i> to describe the increase. Measured implies a steady series of increases (announced every few meetings until the target rate is reached) versus a gradual approach in which there's a long term number in mind but no strict mandate on getting there - a dovish tone.
Would this end up being the pivotal moment of this decade? There is already speculation of recession in the 12-18 month time frame[0] and the energy sector [1] is going downhill since April. I'm seeing some cities and suburbs expanding unlike anything in a while but how much of that could be sustained?<p>To word it differently, did the Fed blink or are the underlying indicators where they want it to be?<p>[0] Given the cyclic nature of recessions, we seem to have artificially delayed it a bit.<p>[1] <a href="https://www.google.com/finance?catid=us-TRBC%3A50&ei=jLpxVtG1HZGx2AadjILoCQ" rel="nofollow">https://www.google.com/finance?catid=us-TRBC%3A50&ei=jLpxVtG...</a>
It will also be interesting to see how much of the FED Assets [1] will need to be sold directly or indirectly in open market action to get to their target rate.<p>[1] <a href="http://www.federalreserve.gov/releases/h41/Current/" rel="nofollow">http://www.federalreserve.gov/releases/h41/Current/</a>
Markets predicting and 'pricing-in' Fed actions is <i>not</i> evidence that this rate hike is meaningless.<p>But if you want to feel pessimistic about the hike, here's the corresponding Zerohedge 'article': <a href="http://www.zerohedge.com/news/2015-12-16/fed-hikes-rates-unleashing-first-tightening-cycle-over-11-years" rel="nofollow">http://www.zerohedge.com/news/2015-12-16/fed-hikes-rates-unl...</a>
I was thinking about this earlier and I have a question about inflation. Could increasing the interest rate cause inflation to rise a bit in the near term?<p>My reasoning for this is that given that banks were borrowing at near zero, could they have had no real reason to put all the borrowed money to work since it wasn't costing them anything to hold it in reserve for later when the rates did increase? Now that the rates are increasing would they not have to use the money a bit to ensure they stay ahead of the interest rates. I was also thinking that there is a threshold at which banks wouldn't have any more money that is just sitting there and having to borrow at higher rates reduces their demand for new funds from the fed thus undoing this initial effect to the hike.<p>Hopefully this isn't completely naive. Please let me know if I'm misunderstanding how the fed and banks relationship works.
What is this going to do to interest payments on the national debt? Will this put a squeeze on spending? Cause tax increases? Or will it be business as usual and the fed buy as many bonds as needed?<p>In the latter case, I think that will cause inflation to pick up unless we can export it all out the trade deficit.
Need is the construction of the world order; satiety is the universal conflagration. (Kahn translating Heraclitus) If you want to stoke consumer demand in a country where the poor have massive televisions and cable, maybe notch up the bullying of people wearing cheaper brands and carrying fake designer brands and charge 30 grand for VR headsets but advertise them during the Super Bowl? I dunno. I've never even had a real job and there aren't any gadgets I want and I want to get more crap out of my house than I want to add. Eliting schooling for hypothetical kids I'll probably never have is the only big ticket purchase I can seem to summon strong desire for.
Fed => Wall St. Bankers => Private Eguity/Venture Capital => Silicon Valley => Start-ups (disruption in labor market & layoffs) => leaner corporations and more profits $$$ => Wall St. Bankers => PE/VC ad infinitum<p>You get the picture by now where's the Fed's loyalty lies in this reverse Robin Hood wealth redistribution scheme. Isn't capitalism wonderful?