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Fed Tapering: The Math Investors Need To Know

Saturday, August 17, 2013 - 4:00 PM
I found this article interesting.  Though it isn't the point of the article, I think it offers another reason why rates may remain (ie:  continue to be manipulated) Low.

Fed tapering: The math investors need to know - Brett Arends's ROI - MarketWatch

Full article in link (the comments after the article offer much to consider), A portion below :
Commentary: What ‘normal’ interest rates would do to stock valuations ...

So let’s do the numbers, shall we?

As recently as May, as a result of the policies of the Federal Reserve, the basic interest rate which underpins financial markets — the interest rate on the 10-year Treasury note — was as low as 1.6%. Today it’s already risen to 2.7%. Furthermore, history says the interest rate has typically fluctuated around 2% above inflation. Over time, that’s what people who’ve been willing to own ten-year Treasury bonds have expected as an average return on their money. As the bond market currently predicts inflation of about 2.5% over the next decade, we can estimate that when the Fed stops rigging interest rates and they go completely back to normal, the rate on the ten-year would probably be around 4.5%.

Now let’s look at what that means for stocks.


To put this in very simple logic: The Federal Reserve has been suppressing interest-rates to boost the economy. That suppression artificially hiked the value of the stock market, by a simple mathematical equation. Now that suppression is coming to an end, interest rates can be expected to rise. That rise ought — again, by a simple mathematical equation — to reduce the value of the stock market. Dramatically.

MikeMike327 posts since
Feb 22, 2010
Rep Points: 876
1. Saturday, August 17, 2013 - 5:20 PM
Good post Mike. I think your comment regarding the article is probably correct. The rate "manipulation" won't end any time soon under Chairman Bernanke, or his successor, whomever that may be.
ShorebreakShorebreak2,695 posts since
Apr 6, 2010
Rep Points: 14,611
2. Saturday, August 17, 2013 - 5:33 PM
Thanks Shorebreak.  

One day at a time.
MikeMike327 posts since
Feb 22, 2010
Rep Points: 876
3. Saturday, August 17, 2013 - 7:59 PM
"to reduce the value of the stock market. Dramatically."

SB stated it rightfully; it is not a matter of whether this (rate increase and the associated stock value reduction; etc.) will happen; but when. 

Politically I would say: It will be a long time when you see this happening.
51hh51hh1,476 posts since
Jan 16, 2010
Rep Points: 6,427