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Will the Feds ever raise interest rates?


berkshire101
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So market conditions are improving, but Yellen is unwilling to provide any concentrate time frame for raising rates.  It seems a little weird.  Mostly everyone thinks rates will increase sometime this year, but will they?  I think when interest rates do rise, it won't be the Feds that will do the deciding, rather the market.

 

It's just annoying how every month for the past several years it's been the same.  "We'll raise rates, but when things improve.  Things are improving, but we'll wait a little longer."

 

What are they so afraid of? 

 

 

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They're afraid because markets are still extremely fragile.

 

We're seven years after the initial blow up and we still have massive deficits, extraordinarily accommodating monetary policy, and massive expansion in the monetary supply, and extremely low interest rates and yet GDP growth is still below average, inflation is far below average, and wage growth is non-existent.

 

Plus, also consider the European drama and the slowing growth in China has the ability to push a major portion of the global economy into a recession further pressuring a fragile "recovery."

 

I don't know if they'll raise rates or not: my guess is they either won't or that it will prove to be a mistake and they'll have to quickly retrench in the 12-18 months after they begin raising them.

 

Full disclosure: I'm in the deflationist camp.

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Guest Schwab711

I don't think they'll be raised anytime soon.  Bernanke said he doubts they'll normalize in his lifetime.  The guy is in his 60s, so for another 20 years??

 

If you look at some of Shiller's charts from 2003-2007, it's scary how far off historical norms we got. The housing market was moving 10%-25% a year for nearly a decade. It's going to take decades of 2%-3% underperformance relative to inflation, in some areas, to return to normalcy.

 

Further to the fragile point, we are used to interest rates occurring between the second log band (1%-10%). Here is a pictorial example of why the Fed/world is afraid of raising interest rates to 1%:

*Scales are in 10bps or (0.1%) - Current rates are ~0% - 0.25% (~12-16bps overnight)

Where we normally sit on the yield curve (more towards the middle - optimal spot):

Log Graph: http://www.wolframalpha.com/input/?i=graph+of+log+%280.01+to+0.1%29+by+.001

Derivative:  http://www.wolframalpha.com/input/?i=graph+of+derivative+of+log+%280.01+to+0.1%29+by+.001

 

Where we sit on the yield curve right now (almost all the way to the left):

Log Graph: http://www.wolframalpha.com/input/?i=graph+of+log+%280.001+to+0.01%29+by+.001

Derivative:  http://www.wolframalpha.com/input/?i=graph+of+derivative+of+log+%280.001+to+0.01%29+by+.001

 

Nothing appears out of place until we see the volatility (derivative graphs) on the price swings is 10x higher. Do you have the article on Bernanke? I really like his work and would be interested in what he thinks.

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Was Bernanke referring to the old normal or the new normal? Old normal is like 5%, but from 0 to 5% there is some room to go up. Also if you splice this idea with that of Buffet who said if rates remain zero for a long time (or lower than normal I suppose is another interpretation) than stocks at current prices are still very cheap.

 

 

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I think the fed is very concerned about putting too much upward pressure on the USD.  Tourism, and US exports are going to get killed if they raise rates too much. 

 

By example:'Canada has had two interest rate cuts this year and its killing our currency (along with oil) I think the BOC is stupid for dropping the rates.  By killing the currency our companies and governments cant afford to upgrade machines and tech which comes from EU, Asia, and of course the US. 

 

I think were all stuck with Near zero rates for a long, long time.  I think the drug of ZIRP works initially, but becomes an addiction that is impossible to break.  I dont think there is any time in history that I know of when borrowing was so cheap for so long.  There is no way a single government can get out of it by itself in the global context. 

 

Everything is backwards from the way people have been schooled to handle money for most of the last few hundred years.  It pays more to borrow to invest than to save. 

 

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So market conditions are improving, but Yellen is unwilling to provide any concentrate time frame for raising rates.  It seems a little weird.  Mostly everyone thinks rates will increase sometime this year, but will they?  I think when interest rates do rise, it won't be the Feds that will do the deciding, rather the market.

 

It's just annoying how every month for the past several years it's been the same.  "We'll raise rates, but when things improve.  Things are improving, but we'll wait a little longer."

 

What are they so afraid of?

 

Perhaps the Japanese experience as discussed by Richard Koo?

 

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When you have inflation for a long time people say it's the natural order, it'll always be like that.

 

When you have little inflation for a long time people say it's the natural order, it'll always be like that.

 

I don't know. Markets tend to end up doing whatever surprises the most amount of people, so we'll see what that is, but it probably won't be quite what people expect (on all sides -- there's always more possible events than actual widely held projections in these complex systems with feedback loops and lots of variables).

 

tl,dr: No idea, but probably not what people extrapolate from the present day, as they always do.

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