Thoughts on Fed rate reduction

Discussion in 'Business, Investing & Finance' started by ChiefGator, Jul 18, 2019.

  1. ChiefGator

    ChiefGator A Chief and a Gator, Master of the Ignore list!!!!

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    Rumor has it that the Fed will be lowering rates like .5 percent soon. Some of the rational is that internationally others are reducing rates so we need to do so as well.

    I don't think they should have raised rates, and I think they are liquidating their balance sheet.

    With the US economy being good what do you think of this proposal?

    I would like to hold where we are, and .5 seems excessive. I guess it could help re-election but generally I don't like the Fed managing the economy

    Bloviate as you desire.
    Fed vice chair says US economy is strong, but uncertainty has risen
     
  2. 78

    78 Dazed and Confused
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    50 basis points cut? Think about that. A 20% rate cut during an expanding economy. Is there even a precedent? The markets would go gaga.
     
  3. ChiefGator

    ChiefGator A Chief and a Gator, Master of the Ignore list!!!!

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    Yes it is almost insane. The other thing that surprises me is that only you have posted in this thread. I really expected it to be more popular and work toward our million posts and restart this portion of the site. Maybe few are even looking.
     
  4. TLB

    TLB Just chillin'
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    I can't speak for others, but my looking in on this forum wanted, as I figured it would. Good material, just limited discussion.

    I don't know enough about macro economics to even venture a rational guess on what a rate cut would do, or why we'd do it. I expect a President can ask for rate changes, but isn't it at the discretion of the Fed Reserve? Or do they answer to the Pres under the Exec branch? Wouldn't lower rates mean more money for lending, which then drives up housing costs = more money means more demand means pricing on most things go up? Would that be a ploy by the President to hide higher costs of tariffs? Would it be a ploy to over inflate the health of the economy in the short run to give him a chest pounding moment leading up to elections?

    Like I said, the ignorant, if pressed for opinion, tend to have more questions than answers.
     
  5. ChiefGator

    ChiefGator A Chief and a Gator, Master of the Ignore list!!!!

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    The president can only whine, he has no power to fire or demote. He thinks that they should not have raised rates the last time, which I agree with.


    Being retired and interested I sometimes listen to the actual testimony or interviews.

    It really won't effect me directly, it should reduce yields on savings and debt.
     
  6. no1g8r

    no1g8r Bringing Reason to the Masses
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    The Federal Reserve is a private enterprise that was created in 1913 when Congress abrogated its responsibility to manage the US Money supply and delegated it to a group of major banks. It was a knee jerk reaction to the Panic of 1907 that caused a run on banks during the recession. Instead of letting things play out, or managing through governmental policy, the government turned to JP Morgan who pulled other major bankers together and flooded the market with capital to stimulate the economy and turn around the 50% stock market drop. That overall approach was formalized in the Federal Reserve Act of 1913.

    Admittedly, there was a lot of volatility in banking and rates at the time, so some intervention may have been helpful then. But, in my opinion, with the technology out there today, let the market determine the rate that banks charge each other for overnight use of each other's capital to maintain the daily reserve requirements, without having it range-bound by the Fed Funds rate (the target the Fed would like to see banks charging each other) and the Discount Rate (the rate that the Federal Reserve will lend to the banks to meet the reserve requirements if banks don't agree on a rate to lend to each other).

    Sure, it might cause some short-term volatility, but letting the market set the rate will provide a more sustainable lending rate that doesn't create bubbles across the economy, the way the rate manipulation does today.
     
    • ChiefGator

      ChiefGator A Chief and a Gator, Master of the Ignore list!!!!

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      Great history, I knew this but needed a reminder. Thanks!!
       
    • no1g8r

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      • Theologator

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        I sit on a bank’s board. Our analysts have been expecting a rate cut - even a declining rate environment - for a few months. Anticipation of the actual cut is already affecting the markets. This should extend the recovery and stave off or soften the cyclical correction that we’re due.
         
      • BMF

        BMF Bad Mother....
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        I'm no expert on this subject, but imo, it seems artificially low. I don't want rates up too high, but (imo) it should be at least one full point higher.

        I remember buying my first house in the mid-90's at 7.125% and I refinanced it about 6 months later to 6.75% on a no-cost refi (I had to pay for the appraisal) and I remember saying, "I can't believe I got a mortgage for less than 7%!" Now I'm in a 30-year at 3.25%. It's ridiculous (but I'm not complaining).
         
        • FireFoley

          FireFoley Senior Member
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          I expect the Fed to cut rates by 25 basis points at its next meeting but not 50. I believe it will be seen as them taking back the 25 basis point hike they made in December, which was a mistake. But either way I am not of the belief that 25 basis points either way is a big deal. But there is a lot going on macro economically that has created a great cause of concern. As low as our rates are, they are high relative to many other developed nations, specifically Germany Japan etc. which carry negative interest rates out 10 years +. so that in and of itself creates big demand for our longer term debt at 2 or 2.5 percent. Even tho we have had to increase our issuance of debt to continue to finance the deficit, the low rates world wide have kept the demand for our paper strong, thus keeping rates low. Secondly, the market/ yield curve has already sniffed out a rate cut, so as usual the Fed is behind the curve. The only argument that i could buy for a 1/2 point cut would be to drive short term rates even lower to try and help the inverted yield curve. I don;t think the inversion has been that harmful yet, b/c bank leading has not increasing very much. Secondly most of the big banks never raised their deposit rates much, so their net interest margin was only hurt slightly. Remember banks borrow money from customer's short term (deposits) and loan it out to borrowers usually long term. The rate differential is the net interest margin and can be as high as 5 or 6 or 7 percent depending on the economy. Well these spreads are almost zero and some are negative and the longer it goes on the more concerning it is. And remember it is also thought the FED is going o stop liquidating the balance sheet. If they do that is akin to a rate cut so 25 basis point cut along with ceasing the balance sheet runoff might equal close to 1/2 point. This entire game has been going on since 2004 ish on when anyone with a pulse could get a mortgage loan and it just escalated. I have said for years that I have no idea how we ever get out of this morass other that having some sort of 8 percent or more natural growth spurt. Otherwise it will be a never ending cycle of the FED trying to keep risk assets pumped up in value until they get lucky with growth or it completely crumbles and the world melts. Either way I hope I live long enough to see what happens and am able to read the text book.
           
          • Theologator

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            Our macro economic picture has changed a ton since the 1960’s. Mortgage rates used to be 3-6%, then they shot up and are really just back on the low end of those historic ranges.

            [​IMG]

            The Fed has to keep rates low because substantial increases shoot up interest on our national debt.
             
          • BMF

            BMF Bad Mother....
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            I get it, but my issue is (imo) it's artificially low. A 5% 30-year mortgage is reasonable. Keeping the rates so low has caused the housing market to reach - what appears to be - another bubble. Also, I'd like to see savings interest increase (CD's, money markets, savings accounts, etc); again artificially low rates (on the other end of the mortgage interest)....
             
          • Theologator

            Theologator Enchanter

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            Not arguing with you, just added some context. Our first mortgage was 11.5%. We were thrilled when we refinanced a couple of years later at 8%. We are now at 3.65%.

            The Fed rate affects but doesn’t drive mortgage rates. We are selling:buying right now so I DO need those rates to stay down a few more weeks.

            You’re right about having decent rates attracting some depositors to banks. That affects their liquidity for lending, which is important for job creation, too.
             
            • FireFoley

              FireFoley Senior Member
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              I mentioned earlier that very few large banks raised their deposit rates for savers in order to preserve their Net Interest Margin. But numerous online banks that are FDIC Insured were offering money market rates as high as 2.4%. Well I finally got the notice a few weeks ago that two of them are cutting their money market rates by 20 basis points. I knew it was going to happen and surprised it took so long, but it was nice while it lasted. Now I don;t think this portends anything regarding the size of the FED moves, but what I see it as the first step to deposit rates heading back to near zero if not zero. I still think the 10 yr. Treasury slumps well below 2% in the future and that the FED will be forced back into the Quantitative Easing business again. They are still somewhat easy but I dread the thought of them ratcheting up asset purchases like they had to do starting 10 or so years ago. At some point there will be diminishing returns.
               
              • 78

                78 Dazed and Confused
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                I'd venture to say things are askew. The 10-year is at 2.05% but there are external risks. If you're looking to refinance, you want to strike it at current fixed rates. If you're looking anywhere else, it's a crapshoot ahead of the FOMC meeting.
                 
              • ChiefGator

                ChiefGator A Chief and a Gator, Master of the Ignore list!!!!

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                Great analysis, I think that we won't be getting out of the trap that we are in. The government is committed to increasing debt as far into the future as I can see, no real alternative exists other than say cancelling debt that would have many negative effects.

                The fed is also in a box, they really can't do all that they would like to do, probably they should have liquidated their balance sheet (somewhat) before changing rates. I do wonder if anybody has a long term plan, or just jerks around to manage short term issues (not just us but globally)
                 
              • TLB

                TLB Just chillin'
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                Just refinanced our 30y @4.63% (25y left) into a 10y @3.63%. Change to monthly budget won't be that much, but security in having this DONE much sooner is a great relief.
                 
                • FireFoley

                  FireFoley Senior Member
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                  Well done. That is the way to do it. Refi the amount you owe as opposed to taking a ton of cash out (unless you need it for an emergency). The amount of money that will end up in your pocket by shaving 15 years off that mortgage will be significant. Way to Go!!!!!
                   
                  • GatorInGeorgia

                    GatorInGeorgia Senior Member
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                    I’m in the same boat. I got a 30 year fixed in ‘98 for 6.875%. Unfortunately due to inertia/laziness/apathy, I actually didn’t refi for several years (I’m guessing I refi’ed sometime around 2004?) and got a rate around 4.75% on a 20 year fixed, if memory serves me. I was stoked and couldn’t believe that not only did I chop about 4 years off the payback timeframe but I also lowered my monthly payment. I refinanced again sometime around 2011 and locked in at 3.875%. I wouldn’t be surprised to see rates fall back down below the lows from several years ago which I believe was around 3.35% for a 30 year fixed. I purchased a new house in May 2018 and damn near hit the top of the rate cycle at about 4.75%. Suffice to say, I’ll be refinancing that mortgage in the very near future.
                     

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