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Comment by majos | Hacker News Reader

Dumb question: does this mean normal citizens can take out loans at near-0% interest, or something close to that? I know credit card interest rates are typically tied to “the fed rate” but a but higher?

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The Fed rate is the interest rates that the Fed pays banks for their deposits in the Fed. By lowering it, they’re incentivizing the banks to loan the money and provide liquidity into the market. Since banks need to make a profit on everything, they’ll loan the money out at a higher rate for things like mortgage, car loans, and credit cards. Depending on the credit worthiness and the collateral, the rates will differ (mortgage lower than an unsecured credit card). Ultimately, the Fed lowering the rates will lower all interest rates, but you’ll never get to 0% as a consumer.

>but you’ll never get to 0% as a consumer.

Unless we see negative fed rates. Not that I think going so negative we see consumer level 0% mortgages is likely.

Ironically, much of the tax advantage of owning vs renting is embodied in the mortgage interest tax deduction. If there were no interest, obviously it would be a good deal, but would not have the additional benefit of tax avoidance that it does at present.

Much of the tax avoidance from primary residence property has been removed from the tax code already due to the TCJA. Not all of it, but most of it. It also makes no sense to have a mortgage for the tax break. Rentals have depreciation and the interest remains deductible as an expense on them there, so that isn't really an issue.

Regarding tax avoidance from primary residence, what specifically? I can still deduct mortgage interest. Are you talking about not itemizing some home ownership expenses (like what?) because standard deduction increase? Just wondering what I’m missing..

You can't deduct it with the new larger standard personal deduction, only if you itemize. The Trump tax bill was a reform made the mortgage deduction moot for about 20 million taxpayers.

Take a look at Europe with negative rates. Every bank has a statement that if the rate goes below 0 your effective rate will still be above that.

if the consumer rate is 0%, what is the stop the consumer from borrowing an unlimited amount of money?

One note... what you're describing is the IOER rate, not the fed funds rate. But other than that you're spot on.

You'll never get zero on _some_ products. Retailers utilize low interest rates to provide "direct" financing to incentivize purchases at their stores. This is often provided as a "promotional"[1][2] rate with the hope that it will spur purchasing in the short term and then make money on the financing in a longer timeline. Often this is done at stores which sell "durable goods" (e.g. appliances or automobiles). The takeaway? You can absolutely get 0% as a consumer, as always though there is fine print.

[1]: https://www.mymoneyblog.com/be_careful_of_0.html [2]: https://www.edmunds.com/car-loan/what-you-need-to-know-about...

Back in '95, Wachovia ran a short credit card promo, called 'Prime For Life'. The account changed hands a few times, and is currently with Chase, but it remains nailed to prime, albeit an $88 annual fee. No, they have never raised my $7K limit, the effers.

https://www.questia.com/magazine/1G1-16441751/wachovia-claim...

I glossed over "credit card" at first and now I'm 100% jealous. That is single highhandedly the greatest credit card ever haha! I'd pay $88 for that. You garner barely any interest as it stands!

That's kind of outside of the topic of finance though. Subsidized car loans are just as relevant to the financial markets as free samples at Costco are relevant to agriculture prices.

The federal funds rate is the rate banks pay when they borrow from the Fed.

In financial markets, there's a formula that banks use to determine interest rates:

Interest Rate = Real Risk Free Rate + Expected Inflation + Default Risk Premium + Liquidity Premium + Maturity Premium

Fed bond rates are what determine the 'risk-free' rate. A bank can have the fed hold on to their cash and it is really safe there. Safe enough, that financial markets consider it 'risk free'. This is why all of your loans are dependent on this number.

Banks add on a premium for inflation -- they want the dollars they get paid back in to be worth the same in real value, not nominal.

They also add a premium for default risk. This is the obvious one -- the riskier the loan, the more the bank will have to charge to break even over a large number of loans, where some of them won't be paid back.

The liquidity premium is kind of like a charge for FOMO. If it is hard for the bank to sell (or liquidate) your loan, they might be stuck with a your loan contract in a filing cabinet when they really need some cash. If they can sell your loan on the open market, then they'll give you a better rate here.

And finally, the maturity premium is a charge for uncertainty. A bank can be pretty certain that they know what the financial markets will look like in the short term. But for a 30 year loan? The financial market could be a much different beast in 30 years. This is a lot of risk on a bank that has their cash tied up for that long of a period.

No, this is the fed fund rate, which is just for banks to borrow really short term (overnight usually) to each other. Most consumer loans are based on the prime rate, which has a few points added to the fund rate to cover the cost of borrowing.

Would someone be able to negotiate a 0% loan with a bank you think?

Not unless it's bundled into some other set of services with profit for the bank attached.

Adding some further nuance to this point:

- Many other rates in existing contracts are tied to the fed funds rate so things like existing mortgage and student loan payments may get smaller as a result of this action

- This will only work for new contracts insofar as credit risk does not materially increase (which it will in an economic downturn); banks will increase consumer spreads against the fed funds rate on a go-forward basis

No, because the expense of processing loans becomes more significant the lower interest rates go.

It's like people complain about gas prices not dropping as much as the price of oil, ignoring that the non-oil costs largely don't go down.

Also, as something I read pointed out, the fact that people are rushing to "risk free" debt doesn't mean they are equally rushing to loan money to you, which has some risk.

So for both reasons, consumer loans aren't dropping as much as you'd hope.

I think they're usually tied to the prime rate, but the spread is usually 13% or more. Prime, in turn is usually 2-3% above the fed funds. So you might find a CC with rates as low 15%!

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