Fed Leaves Interest Rates Unchanged
nytimes.com
nytimes.com
The beatings will continue until morale improves.
EDIT:
Here it is: http://fm.cnbc.com/applications/cnbc.com/resources/files/201...
And here is this past June's dot plot:
http://fm.cnbc.com/applications/cnbc.com/resources/files/201...
Strange times.
That's a rather large assumption IMHO. Prior conditions do not necessarily hold true in the future. We went ten years from 1991 to 2001 without a recession. We are due for a recession the same way Yellowstone is due for an eruption.
>Plus negative interest rates being the only tool available to the Fed during a new recession.
This does worry me.
That may be an average, but its hardly consistent.
The period (peak to peak) between recessions for the last 10 cycles has been:
81 months 128 months 100 months 18 months 74 months 47 months 116 months 32 months 49 months 56 months
> Plus negative interest rates being the only tool available to the Fed during a new recession.
OTOH, arguably, the reason that the Feds been forced to be so extreme with monetary policy that that might be the case is that the government has pretty much neglected fiscal policy responses. Which is, generally, not a positive thing, but it does mean that, as exhausted as the monetary policy options might be, the fiscal policy arsenal is well-stocked and untouched.
But it was confirmed as a possibility a few hours later when the FMOC comments came out:
http://www.zerohedge.com/news/2015-09-17/fomc-stunner-one-fo...
It won't work, of course, but what else are they supposed to do?
Just pull up to the Discount Lending Window and ask for some cash.
Moreover, discount window loans are not unsecured - the bank must put up collateral for them, isn't automatic, limitless or guaranteed, terms are very short, and in practice only ever used in times of crisis.
Besides that most people could probably get a refinancing loan from a normal bank for 5% or less already.
That's the justification for interest in the first place 20-30% covers risk to absurdity.
No, it pretty much covers uncollateralised default risk and pre-payment risk.
If it were otherwise, for example, if were a cartel keeping the prices up artificially, then you would expect the same thing from the collateralised market, no? YMMV but my credit card rate is ~25% and my house secured rate is ~3%. The only difference is the house; lender and borrower are the same.
The other argument against undercutting the market and making billions is a variant of the Fermi paradox: why isn't everyone doing it? Maybe not you or me but an institution that can borrow a lot at bugger all, or is cash rich, would hoover up. Or at least drive the rate down substantially.
If there were only one or 2 players then, fine, you could have a big illiquidity premium but there aren't. There are loads of players. In the UK, cash rich companies like the supermarket chains have got involved and have had some impact but it's small, primarily squeezing operational costs and profit margin. But the cards are still running at rates substantially over base.
Unprofitable businesses (startups) don't even pay their employees that much. The established/big players pay higher salaries and do not depend on much credit at all.
Btw, big players are also dependent on a ZIRP, which goes beyond simply 'more credit'.
Doctors are a different ball of wax. They require effectively PhD-level education plus a seriously underpaid multi-year residency before they can actually practice. They also have debt loads that make law degrees look cheap.
[1] Search "lawyer salary" and "software engineer salary"
[2] http://money.cnn.com/2014/07/15/pf/jobs/lawyer-salaries/
Lawschool is a strange thing somewhere between a gradschool and a doctorate. It's a professional school that, like med school, isn't directly comparable to other degree programs.
A law degree is an almost entirely coursework based degree with no dissertation. Attrition rates at elite law schools are vanishingly low (like, less than a half of a percent, whereas PhDs are as high as 50%, 100 times higher). Undergraduate majors prior to law school tend to be the easier ones.
They're smart and hard working students, but no, I wouldn't consider a law degree to be a "doctoral" level accomplishment by any external standard. Personally, I think that simply majoring in CS or other rigorous undergraduate majors represents a greater academic accomplishment than Poly Sci or Lit + Law School.
Think of it this way - to me, a law degree is like running for 70 minutes at an 8 minute mile pace. Not bad, you're certainly fit. Majoring in CS at a tough program is like running a 6 minute mile for 40 minutes. You aren't running as long, or even as far, but the athletic challenge is greater.
Seriously, I've heard that claim a lot, but I don't see any plausible mechanism for the two to be related. The folks investing in tech startups aren't the same ones with easy access to cheap capital who pick nits over a few bps on bonds.
The ones buying startups are the larger corporate entities who are quite liquid right now due to all the money sloshing around. Especially digital media entities like Google, Facebook, Yahoo, et al who have been making a killing on advertising revenue from other highly liquid industries. They may adjust decisions to purchase startups if that no longer becomes the case.
Also even if you were right, it's not just the tech industry that relies on low rates. Anyone who needs capital, which is everyone, relies on low interest rates.
How much money someone "brings in" is not the sole determinant of how much money they make.
And do you believe that engineers should be making the same as doctors?
Case: a support Engineer of my acquaintance worked to retain $24M worth of at-risk customer contracts last year. He got a better job offer, and when he told his employer he was leaving they said "Tell us what it would take to keep you"
He replied "$3M paid over a two year contract"
They said "No, really, what would it take?"
That's how badly Engineers get treated. Given a proven track record, they still couldn't imagine paying him what he was worth. They'd rather lose the next customer.
Some people find this out the hard way, as non-competes are short or hard to enforce (if enforceable at all).
And they usually have lower salaries because of this. Many "eat what they kill" and if they don't sell they don't make money.
> Executives get bonuses when the quarter is good
Everyone in the company I work for gets bonuses commensurate with how well the company does, even the engineers.
You just listed a very, very small part of every company. Other than sales people and high level execs, no one else has their compensation tied by a significant extent to their productivity. The rest, the accountants, financial analysts, business analysts, strategy analysts, marketers, billing analysts, researchers, designers, managers, etc. all are in the same boats as the engineers.
>But Engineers, who actually do the f'ing work
Construction workers actually "do the f'ing work" as well and they aren't compensated extremely well because although it is a very hard job there are many people who can do the job. There are also many competent engineers who can probably do your job as well, lowering your salary. I work in finance, and there are even more people who can do my job well than there are engineers who can do your job well, thus I am not paid like an engineer. This is how the labor market works.
Its that attitude, that engineers can be bought by the 6-pack for any application, that causes tragedies like this. Any new guy will fail to save contracts at a much higher rate, perhaps not having any benefit at all until a relationship is built up over a period of years (with new customers of course; the old ones will leave).
Friend of mine leads a team that has a 30 million dollar contract with a government client. It's a team of 5 or 6 I believe. He's paid I think about 110K a year. Personally, I wouldn't be okay with that.
Also, sales staff make commission on all their sales. They're paid based on how much business they bring in. I believe that as engineers retain business and help businesses grow and make more, they should be compensated accordingly.
I'm not saying anyone should or shouldn't be making any amount. I am saying that it doesn't make economic sense to pay an engineer millions when you can pay another $150k to do the same job with some productivity loss. If I ran a company and I thought an engineer added a large amount of value relative to other engineers in the labor market you bet I would pay him/her an astounding sum of money, but only up to the point it made economic sense.
>Friend of mine leads a team that has a 30 million dollar contract with a government client. It's a team of 5 or 6 I believe. He's paid I think about 110K a year. Personally, I wouldn't be okay with that.
So how much do you think they should be paid? $300k? $500k? Why would an employer pay them that much when they could hire another engineer for $110k and experience some productivity loss?
That statement would be more true if you substituted "startup scene" for "tech industry". There's a lot of solidly-profitable tech-industry businesses. At least, as regards the need for "insane amounts of capital" being made available to "unprofitable businesses".
The relation to low interest rates and the direct sensitivity to small changes in the Fed Funds rate is, even in that case, far from clear.
Chapter 10: Of Wages and Profit in the different Employments of Labour and Stock
https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_I/...
"Part 1: Inequalities arising from the Nature of the Employments themselves[edit]
"The five following are the principal circumstances which, so far as I have been able to observe, make up for a small pecuniary gain in some employments, and counterbalance a great one in others: first, the agreeableness or disagreeableness of the employments themselves; secondly, the easiness and cheapness, or the difficulty and expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and, fifthly, the probability or improbability of success in them."
The section continues to explore each of these in detail.
Note particularly the risks and preparation components: training, stability of employment, and probability of success. Also the "trust premium" for certain professions:
"the wages of labour vary accordingly to the small or great trust which must be reposed in the workmen.
"The wages of goldsmiths and jewellers are everywhere superior to those of many other workmen, not only of equal, but of much superior ingenuity, on account of the precious materials with which they are intrusted.
"We trust our health to the physician: our fortune and sometimes our life and reputation to the lawyer and attorney. Such confidence could not safely be reposed in people of a very mean or low condition. Their reward must be such, therefore, as may give them that rank in the society which so important a trust requires. The long time and the great expense which must be laid out in their education, when combined with this circumstance, necessarily enhance still further the price of their labour...."
Another factor, one Smith doesn't consider, is the durability of skill or ability within a profession or trade. In the Tech world, state-of-the-art is constantly evolving, to the extent that professional obsolesence is a real risk. This is the case in other trades as well (Car Talk discussed this in auto repair som years back). But it's a consideration not much weighed in the market.
Also cumulative stress and burnout.
Pricing these into the market is a challenge.
Toda תודה Madame Yellen
Don't you love trickle-down economics, crony capitalism and the Fed/Wall St. cartel?
I really like how Americans have no qualms about the fact that a private institution controlling their currency and their economy and in turn their life but whatever floats their boat.
At one time, it was the Federal Reserve's job:
"to take away the punch bowl just as the party gets going"
Yeah, I laughed at this: "But they have expressed concern that the recent stock market downturn may be a sign of weakness in the domestic economy."
The market is down because of the impending rate hike. They have to just bite the bullet and do it.
It has to be slow of course, or they'll trigger housing collapse part II. See what the chart in TFA shows? After the dot-com bust and 9/11 they dropped rates drastically to stimulate things. Then after a couple years near zero they jacked them up. What happened is a bunch of people refinanced with low rates pumping up house prices and then they pulled the rug out from under them. Now after a prolonged time of near zero rates we're in a similar position with inflated home prices.
http://money.cnn.com/2015/08/24/investing/stocks-markets-sel...
People are alot more concerned about trade with China than a token Fed Rate hike, sorry.
Wallstreet is terrified of the rate hike. If it is indeed the start of a ramp to 3.x percent in one year, shit is gonna fall apart again. There really is no way around it due to the inverse relationship between interest rates and housing prices. Better lending practices and stress testing will ensure the big banks can handle it this time. That doesn't help your 401k though.
Looks like we'll see whose right on this by the end of the year. I'm betting on the rate hike in October.
This is the most bogus thing I have read all day. The China argument is smoke-and-mirrors, and it doesn't hold any water. The real reason is because of the rate hike. Yeah it would be small rate hike, but the any country that has any stock in US dollars has been expecting rate hikes to gradually increase. So everyone is expecting that if the Fed raises rates, it will continue to do so for awhile. That is why the markets go down when there is talk of a rate hike. And now the jig is up, you can expect to see the dollar start to fall because the world now knows that the Fed doesn't have the galls to up the rates and any stock they have in US dollars is pretty much worthless.
Says the guy claiming that everything in US dollars is going to be worthless...
HackerNews on financial issues is like reading Yahoo Finance.
Although I am worried about what a rate increase might due I have a hard time believing that a 25 basis point rate "hike" would shatter the markets.
More, low interest rates are insufficient tools alone to achieve the goals for which the Fed deploys them, so that the conditions which motivate low interest rates are not sufficiently resolved by them to move the market to conditions where low interest rates would stop being desirable.
Monetary policy isn't magic and even with herculean interventions has limited efficacy (basically, at the moment, limited to not making things worse); the problems it addresses often require simultaneous fiscal policy actions to achieve substantial, durable changes.
> At one time, it was the Federal Reserve's job:
> "to take away the punch bowl just as the party gets going"
That's still basically true. The thing is that, even with a rather full punch bowl set out, the party steadfastly refuses to get started.
Doesn't that depend on which party you're talking about?
I'm under the impression that the Fed's current policies are correlated with an asset bubble, and that's a classic "party" central banks are known to end in preference to a much worse end being forced later.
The former are also much more strongly affected by fiscal policy rather than monetary.
Go negative.
The idea that they should raise rates to slow the economy so that they can turn around and lower them to stimulate it defies reason.
The rationale for increasing rates is to forestall inflation rising above the targeted level; inflation remains below targets and is expected to in the short term, so there is no reason to raise rates.
> What will they do if the market crashes and the rate is still 0?
Whatever they do won't matter much, just as it wouldn't if the market crashed with the rate target raised to 1/4 - 1/2 percent instead of 0 - 1/4 percent where it is now.
If the economy hasn't had the kind of strong, broad recovery that would support higher interest rates before the next crash, monetary policy isn't going to do much to deal with the next crash (and monetary policy isn't going to produce that kind of strong, broad recovery, either.)
The Fed as an independent central bank, while it has important responsibility, has a fairly limited role; most of the strong economic policy levers are fiscal policy that is in the hands of the political branches of government, particular Congress.
The feds job is to on occasion liven up a dieing party by making a beer run, sometimes a couple beer runs. It isn't the fed's job to drive everyone to the beer store and open a tab. Rather then deal with the reasons why the party is failing, this fed has given them the lift, bought the beer and hired some strippers. There is a fine line between fun and reckless.
For some reason people want a rate hike for the sake of a hike. I'm glad the Fed is being cautious.
[1] https://en.m.wikipedia.org/wiki/Economic_bubble#Identifying_...
[2] https://en.m.wikipedia.org/wiki/Japanese_asset_price_bubble
If people foresee the bubble, why do they participate in it? Why aren't the on the "short" side?
I get bubble mechanics. What I don't agree with are forecasts like, "What about asset bubbles?" Well, what about the income gap from years of sub-optimal growth happening right now? Why does an asset bubble (which have occurred throughout history, regardless of rates) trump that scenario?
The idea of damaging growth now to forestall a possible asset bubble in the future is not a good tradeoff.
From John Maynard Keynes himself, "The market can stay irrational longer than you can stay solvent.”