Fed Question

July2022 | Aug 11, 2019 | 41 posts since 2018

I am not an economic guru but during hard economic times doesnt the Fed try reducing interest rates to spur the economy forward?

The question is: If rates are already rock bottom when a recession does occur, what tools will the Fed have to beat back the flames of a hot recession? It seems we are needlessly putting ourselves out on a limb.

Is it me or is this current economy starting to resemble a Potemkin Village?

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GH1 | Aug 11, 2019 | 1,061 posts since 2017

I think the answer to your question is if already at zero. They will go negative interest. Its already happening in Europe. So it can clearly happen here. There was a article yesterday. About negative interest mortgages. The banks paying you when you buy a house.

GH1 | Aug 11, 2019 | 1,061 posts since 2017

https://www.businessinsider.com/danish-bank-offers-mortgages-at-negative-interest-rates-2019-8

me1004 | Aug 11, 2019 | 1,382 posts since 2010

The Fed's second charge is to keep inflation in check. But inflation has been in check, has not gone high, although economists had expected it to by long before now. They do not understand why inflation has not jumped. But since that is now long over due and not happening, the focus is now on what continued low interest rates, and even lowering them, will do -- unless and until inflation starts to soar. There is a developing feeling that interest rates can, and maybe even should be, as low as possible unless inflation forces an increase in rates. This is different from previous thinking that history shows rates need to be at a certain vicinity in order to keep the economy balanced on an even keel for the long run.

No one seems to be considering the longer view now, such as what happens when you have made the entire economy addicted to low interest rates, have everything leveraged up the wazoo to the point that any interference with that with bring down the house of cards. How can you raise the rate at all without crashing the economy when everything is leveraged to the hilt at low rates?

With the duration we have had with extremely low rates -- more than a decade now -- any Fed rate over 2% will have an over-effect -- just as an addict has to go through withdrawal to get off the drugs. This is what Trump is screaming about, he wants to continue the drug flow, keep them addicted, let them be completely reliant on low rates. The fed kept rates too low for too long , should have raised them probably at least six years ago, at least four years ago. Rates under about the 2.0% mark are simply for psychological effect, to create confidence, not to actually directly do anything, since 2% already is ridiculously low. If they could not make money investing at 2%, the getting to 1% is not going to help. How do you boost an economy that already is at very full employment? It sin; a problem that growth has slowed when you hit full employment. But the powers that be are addicted to the Ponzi scheme, have no talent at managing an economy, or probably anything else. In fact, if you want to boost the economy, the best way now would be to finally give saves the relief that is so over due then,let them has a decent return, and then they can finally have something to spend.

The Fed rate was and is at the level below which interest rate cuts are not going to spur the economy, as if they were not taking loans with the Fed rate a 2.25% or 2.0%, the interest rate was not the reason. If it above 2% when the power of the Fed can actually have a significant effect -- this is why all the screaming started when the Fed went a mere 1/4% over the 2.0% mark. I have been pointing out this 2% level for years.

Ally6770 | Aug 11, 2019 | 4,324 posts since 2010

Low unemployment and 2% inflation is the mandate of the Fed.
With low interest rates and people not making money on their savings they were hoping that people would spend their money growing the economy. I think everyone that wants a house has a house, everyone who needed to refi has done it. Those that lost everything still have not been made whole. My kids took the little over 2% the mtgs offered and ended up paying off their homes. Maybe people are waiting for lower prices? Deflation? I bought everything I needed after the 2008 recession. New house, new car, new furniture, new appliances and even all new clothes, bedding, dishes, silverware, towel, every dishtowels and dishrags. EVERYTHING. I have nothing that I need to buy now. It is time for someone else to take a turn. Oh and went on my first vacation since 1990 at Christmas time. I did all my traveling when I was much younger but did climb a 780 foot rock waterfall in Jamaica 14 months after I had a new valve put in my heart. Decided to go in the fall when all the clothes were on sale and bought 26 pieces of summer clothes including 3 long dresses, 2 bathing suits for $125.

me1004 | Aug 12, 2019 | 1,382 posts since 2010

2% inflation is not the Fed's "mandate." That is simply is the inflation rate the Fed has decided is its preferred rate.

Until recent years, the Fed's outlook, and that of most economists, was to keep inflation down as much as possible and reasonable. Now, the Fed has switched to wanting it no less than 2%, rather than no more than 2% -- it has taken a stance of minimum instead of maximum. That is BIG change in outlook. But it is not the "mandate" on the Fed, it is the Fed's current choice.

And in recent weeks, Fed Chairman Powell has stated that his thinking now is that inflation is no longer linked to the Fed rate -- so the Fed can go low on its rate with no worry it will spark inflation! And then the Fed lowered it.

As I said above, the economists do not know why inflation has not kicked in. And now, Powell is making some real changes in thinking merely out of that lack of understanding about why inflation has not jumped. They're operating in the dark without understanding things, just based on hope that nothing will change if it has not already, so no problem in cutting rates.

Yes to OP, if rates are already ridiculously low and the economy crashes, the Fed can cut rates all it wants, even to negative numbers, but will not have much shock effect to push the economy, or much of any other effect -- because if people are not investing and taking loans at the current low rates, low interest rates are not the reason why. So lowering them more is not going to make the difference.

This continued very low rate environment, even in the best of times, is a very dangerous position to be in, and all just to try to pump an already maxed out economy.

Ally6770 | Aug 12, 2019 | 4,324 posts since 2010

I should have stated it is low inflation with low unemployment. The 2% has been a targeted amount to keep deflation from happening. There are I believe 5 countries right now with interest rates below zero. The Danes even have mtgs rates below zero.

buckeye61 | Aug 12, 2019 | 454 posts since 2011

Unfortunately, negative interest rates have done very little to bolster the economy in Europe and Japan which is why they've been stuck in a low rate cycle.

CuriousDave | Aug 12, 2019 | 233 posts since 2018

It's possible the Fed has other reasons for this move, even though outside the purview of its main mission. One example would be to prevent the Dollar from becoming too strong, by lowering rates, discouraging excessive foreign investment in Treasurys. In that case, lowering the Fed rate provides some kind of poison pill to prevent excessive foreign (read: Chinese) holdings of U.S. Government debt.

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