Thursday, December 15, 2016

Fed raises interest rate a quarter-point

"Janet Yellen’s decision Wednesday to raise interest rates highlights the major problem with the US economy. It isn’t simply that the economy is growing too slowly. The big problem is that the economy is broken.

Ever since the Great Recession of 2008, the economy hasn’t been functioning the way it ought to and hasn’t been reacting to stimuli as it should. And now it has left the Fed and elected officials few choices.
The economy is a truck with no wheels. A car without a transmission. A canoe that’s up a creeká, with no paddle.
Fed Chair Yellen had to deal with that Wednesday, when the Federal Reserve decided to raise interest rates despite that economic growth in the US this year has been mediocre — at best.
The Fed announced a quarter-point rate hike and promised/threatened another three hikes in 2017. (Don’t count on those. As has often happened in the past, the economy is likely to be growing too slowly to make good on the hikes.)
Don’t get me wrong — Yellen had to raise rates. For one thing, the Fed is merely catching up to the financial markets, where rates have already risen significantly.
A rate hike was also needed because the Fed’s near-zero rate policy for the past eight years is strangling savers and turning everyone into a stock market junkie, which is OK while equities continue to rise but awful when they ultimately fall.
Another reason for the rise: Without a rate hike now, the Fed will be powerless when the economy dips again. Hence, it was necessary so that borrowing costs — at least those influenced by the Fed — have room to be reduced.
If not for those reasons, the Fed wouldn’t even be thinking about boosting rates in the current environment..."

30 comments:

deborah said...

I don't know from economics, but last year at this time I was talking to a woman who was railing at the low interest on savings. It is disgusting what the greedy have done to people who prefer to earn interest, but have been thrown upon the stock market for all their money accruing thingys.

Evi L. Bloggerlady said...

I am pretty sure the Ewok of the Fed will raise rates in 2017 as she is signaling because with Trump in charge she will not care about the short term impact of doing so.


The difference will also be Trump making changes (in rolling back regulations and lowering taxes) that will promote greater GDP growth.

Calypso Facto said...

Bloggerlady's right; the Fed is basically a political organization that sold its soul to try to prop up the Obama economy but ended up just showing its own impotency.

“We should look at whether Fed intervention in interest rates or credit markets distorts monetary signals, so that you get this false economy,” said Judy Shelton, an author on monetary topics and adviser to Mr. Trump, in an interview."

Time to end the usually-wrong, and mostly-destructive Fed.

edutcher said...

Thing is, Trump is boosting the economy just by being trump.

And it's hardly any wonder he nominate a guy for SecTreas (Mnuchin) who wants to get rid of the Fed.

It's another fossil dumped on us by Franklin Roosevelt in his quest for absolute power.

edutcher said...

OT, but very cool.

Monica Crowley, PhD is going to be one of Trump's U.S. Deputy National Security Advisors.

When you consider she's been writing columns with stuff like this all year It turns out that Mr. Trump is the rule, while Mr. Obama was the anomalous exception., it should come as no surprise.

Leland said...

I got a new home earlier in the year, fixed rate. Raise away! Less than 100 now from DJIA 20000.

ricpic said...

deborah doesn't quite say it so I'll say it for her: the Fed's ZIP (Zero Interest Policy) has been EVIL. Savers have been eviscerated.

And Evi is quite right that the economy can only be unfrozen by Trump's cut in the corporate tax rate and even more important his cutting of Obama's deliberately punitive regulations.

AprilApple said...

Bloggerlady's right; the Fed is basically a political organization that sold its soul to try to prop up the Obama economy but ended up just showing its own impotency.

Yes. I hope Yellen if outta there when her time is up.

bagoh20 said...

Nothing is simple. The increase may be necessary - maybe even good. I certainly read that rates should be much higher in an honest free market. I won't pretend to know. I do know that it is costly to people like me invested in business (and that means jobs).

I owe many millions, and even a quarter point takes away a lot of my ability to hire people, pay them, or buy them better equipment to work with. Increases are designed to slow the economy, and the fed knows they cost jobs and reduce investment. That's why they haven't done it. It will not help your savings much, because what the bank pays you in interest is voluntary regardless of the Fed rate, while most business loans are directly tied to it and increase automatically with it. Where does all that extra money sucked out of business go?

bagoh20 said...

I'm currently getting a large loan for expansion. That 1/4 point alone will cost me $400K over the life of the loan. That translates to about 1 job lost, and I'm just one small business of millions across the country.

Leland said...

ZIP (Zero Interest Policy) has been EVIL.

Not just the Fed's; everywhere on the planet where it has been tried.

bagoh20 said...

My whole business and all its jobs would probably not exist if not for the very low interest rates available when I first invested in it, and which thankfully continued for the first few years it took to get it going after the recession. I could have lived with a point or two more, but beyond that and I probably would not have taken the risk.

I have no retirement other than money in saving accounts, so I too wish banks paid more interest, but not enough to want higher rates on loans.

Leland said...

I have no retirement other than money in saving accounts, so I too wish banks paid more interest, but not enough to want higher rates on loans.

You can't have both, and you know this.

I wish no ill will to you or your business Bags. But what you describe is the tip of the problem with ZIP (actually ZIRP). You started your business by taking a loan. You now talk about taking another loan. I'm sure you are paying it back, but lets look at this on the larger scale.

Students aren't paying back their loans, despite already having a lower rate than other types of loans. They are then taking on more loans, and if they repay the new loan, they do so on the basis of paying off the higher rate loan first. So long as the lower rate is low; there is no rush to pay back the money. The lender needs that money back, because the lender isn't printing money. The result is the impact on those who have saved for the future; because they put that saved money into accounts that were then added to others to make loans to people that aren't paying. So they get nothing back.

And if that wasn't bad enough, look what is happening from all the spending from the loans! Sure, business get most of that money, but people are buying things they don't really need, and prices are out of whack. Real inflation, the price increase on things we need to live like food, is increasing at a higher rate, because demand is high when money is cheap. So this impacts both the poor and elderly on fixed income. That's why we see a wider divide today between the rich and poor, with a destruction of the middle class.

And it is not over... eventually, the loans will need to be repaid in some manner. This could be by a mass forgiveness, which has already been bantered about. That will solidify the money transfer from the savers to the spenders. Or, the spenders will finally slow down, and pay back the loans (you can laugh, but isn't this what they should be doing, because they said they would?). Neither one of these things point to a healthy economy for a short term, which is pretty much why we've kept raising our national debt for the past few decades.

I'm not for high rates, but ZIRP supports irresponsibility. I'm happy to see us move away from it.

Rabel said...

I question the timing.

bagoh20 said...

I hear you Leland, but I think irresponsibility is mostly due to us forgiving irresponsibility, not low rates. I'm actually very conservative about borrowing, but I know that my business loans will never be forgiven without bankrupting me. That stick is powerful incentive to be responsible. Irresponsible people will borrow at any rate. That's why so many of them run up their credit cards at 20% interest. Approving loans to bad risks is the real problem.

Evi L. Bloggerlady said...

A lot of conservatives hate Mnuchin because he has been personally playing the current system for years.

That does not mean Mnuchin is bad (from a conservative perspective), if he understands the current system and wants to dismantle it. Hopefully we will find out what his intentions are at Treasury during the confirmation process.

That also applies to Tillerson. It is troublesome he is the pick supported by Condi and Gates (talk about establishment GOPe) and promoted carbon tax and other PC crap at ExxonMobil, but if he is ready to go in a different direction that might be ok.

Rumors are he is not hot for Bolton. I do not like Bolton's neocon side, but I know Bolton's mustache will always put America First.

Anyway it is interesting to see how all this plays out.

Evi L. Bloggerlady said...

Bags, sorry your loan is going up, but this rate increase has been dangerously pushed off for years. It is going to happen now, to some extent (the Ewok would have even had to do it for Crooked Hillary had she won). And provided it is not too drastic, it is probably a healthy thing in the long run.

Evi L. Bloggerlady said...

Bags, before 20% credit cards those same mooks went to loan sharks. Not too much difference between the credit card companies and the loan sharks, although latter don't respect bankruptcy discharges.

ndspinelli said...

Rabel, Trump predicted the timing during the campaign. But, free money has to stop. There's never a good time, but this should be a not bad time to do it. It was so expected and overdue the hit should be minimal.

Leland said...

Approving loans to bad risks is the real problem.

I agree with that too!

Methadras said...

Who here wants to start a pool that The Trump Administration begins audit proceedings on the Fed and he ends up choking on one of his Trump brand steaks?

William said...

We have a twenty trillion dollar national debt. If rates go up, somebody is going to get severely screwed.......I can live with higher rates. A return to seventies type inflation rates would put me on the losing side of the equation......I don't understand economics. I've never made it all the way through an economics book. Electricity and economics. My life is dependent upon forces which I do not understand. I have a bit more trust in electrical engineers than I do in macroeconomists, howeve. We've had less power outages than financial panics.

Eric the Fruit Bat said...

I'm pretty sure this is one of those problems that Donald Trump is going to fix right up, first thing, same as all the others.

deborah said...

I feel your pain, William, I still can't fathom how a phonograph works.

As far as student loans, a) banks were borrowing money from the Fed at 0% , then turning around and charging students 5%(?),and b) it's illegal to default on a student loan.

Methadras said...

Deborah, furthermore student loans fall outside constitutional protections of bankruptcy. Why, no one knows.

ndspinelli said...

Lobbyists are why. Mortgage loans, student loans are not dischargeable. You can petition the bankruptcy judge, but the burden is on you to prove it is an undue hardship. Civil judgements resulting from a criminal action are also not dischargeable via bankruptcy. I've tracked down many deadbeats who have fled payment on judgements resulting from injuring or killing someone via DUI. Tracked a couple right to the Mexican border!

deborah said...

Thanks, Meth, that's more or less what I meant.

Yeah, Nick, it's the height of cynicism to lend many kids money for what turns out to be an unprofitable investment. Buyer beware, and all that, but I think a class action suit is in order against banks making risky loans to people not mature enough to make an informed decision.

Methadras said...

deborah said...

Thanks, Meth, that's more or less what I meant.

Yeah, Nick, it's the height of cynicism to lend many kids money for what turns out to be an unprofitable investment. Buyer beware, and all that, but I think a class action suit is in order against banks making risky loans to people not mature enough to make an informed decision.


Deborah, who's fault is it that kids/parents make a poor choice in investing in their child's major while consuming gobs of money to do it and realizing after the fact that it was a poor investment? If we churned out more scientists/engineers and more meaningful majors/careers where you will see an ROI on that money spent, I think your argument may hold more water.

Given that, I don't know what a liberal arts major is expecting to get in terms of wage. If you major in Russian literature and can't nail a job, that's no ones problem, but your own. Also, another point of contention is the cabal of universities/government raising tuition rates over time. Government backed/guaranteed student loans are a boon to universities that suck on that tit and raise tuitions to get as much as they can. Banks aren't going to pass up the opportunity to underwrite these loans when they are government backed.

So I don't know why you would go after banks, when it is the university/government duopoly that is the real problem.

deborah said...

I know where you're coming from, but isn't the bank also responsible for making risky loans? Kind of like the housing crash?

deborah said...

Oops, never mind, I withdraw the question.