Comment by emgeee | Hacker News Reader

Comment by emgeee | Hacker News Reader

I'd just like to point out that the "why now?" question is probably related to a major shift in America's monetary policy. Since the 2008 crash, the Fed has been using a policy of "Quantitive Easing" (QE) to keep interest rates artificially low and thus encourage lending and spending. It's been known for while that the Feds were looking to end this policy sometime this year and it's looking like the end of October will be that time. Although the Feds seem to indicate that they won't actually raise interest rates until sometime next year, halting QE will have the affect of making less money available for lending. No one is really sure what is going to happen but this is an event that will affect the economy as a whole. To me, it's sounding like one of the industries that could be particularly affected by this policy is Tech and the result will be a market correction in startup valuations.

Links! http://www.investopedia.com/terms/q/quantitative-easing.asp http://www.economist.com/blogs/economist-explains/2014/01/ec... http://www.forbes.com/sites/investor/2014/09/23/the-end-of-t... http://blogs.wsj.com/moneybeat/2014/08/05/goldman-sachs-here...

They've actually been scaling QE back for quite a while now.

Is that a 1% drop every year? I don't know. I do know that interest rates on savings have stayed near zero.

No, the drop has been quite substantial. From what I can tell the Fed was buying $85B worth of bonds monthly at peak. It's down to ~$45B now and they are planning on a final $15B in October.

I wonder if there's a loophole to explain why interest rates haven't budged.

You are correct, the Fed has said they would be ending this policy sometime this year and they're on track to do that. How I understand it, the big news here is that they've changed their language about raising interest rates from "we'll do it sometime in the future" to "we're going to do it sometime soon".

I don't think investors agree with you. If you look at the yield curves for the 1 year to 5 year treasury bonds[0] over the last year they have stayed relatively stable. Which means the investors expectations of future interest rate have been relatively stable. I don't think this supports you're theory that the Fed will be raising interest rates any time soon.

[0] http://www.treasury.gov/resource-center/data-chart-center/in...

Good info. Supports my theory that the plan is to kick the can down the road until it inevitably falls off a cliff.

I really don't have much grasp on the macro-econ stuff. Do you have an idea on what would such a cliff would be? Liquidity trap?

It think it would be a worse version of the 2008 crash. Many of the issues that led to that crash, instead of being fixed, were temporarily bandaged with accelerated borrowing and spending, like a credit card junkie who staves off the inevitable with ever more cards.

The yield curve has been relatively stable at close to 0. Indeed (as I understand it) that's the entire point of quantitive easing: it artificially keeps interest rates on long term securities down to encourage that money to be lent and spent http://marketrealist.com/2014/03/fed-taper-quantitative-easi....

The short term rate is 0. The yield curve is the curve if you plot interest rates on the y axis, and length of treasury bond on the x axis. This creates a curve that tells you what investors think will happen to the interest rate over the next 3 months to 30 years.

Hasn't the Fed been warning they'll halt QE "soon" for many years now? I think the actual policy is to keep interest rates low until it's impossible to do so. At present it seems there's no limit in sight to how many $trillions can be borrowed to keep QE going. Why wouldn't the choice always be to keep kicking the can down the road, when the alternative is to pay the piper?

As I understand it, the Feds actually have certain metrics like unemployment that they're trying to achieve. The big announcement from last week was that they're starting to hit their numbers and so they'll shift away from using QE (which is somewhat of an emergency tool) back to their main tool, setting short-term interest rates.

No, not really. They have been saying that they are scaling back with eye toward ending it, but not before the unemployment rate is under control. For example this is from July 2013.

Fed Chief Ben Bernanke announced in late May that the central bank intends to start slowing down the pace of its purchase “later this year” if the economy continues to improve. He said the purchases could conclude by mid-2014 if the unemployment rate is close to 7%.

http://www.marketwatch.com/story/fed-gives-no-hint-on-qe-tap...

There's a feedback loop to consider. Conclude the purchases when the unemployment rate is close to 7%, then the unemployment rate hits 9% because the nearly-free money tap is off.

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