US prime rate

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Script

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Are the US going to raise the prime rate in December? And if so, what will happen? Yellen has been talking about it for quite a while now, linking it to the unemployment rate and economic prospect, and I'm sure any raise will be homeopathic (i.e., 0.something percent), meaning not a big deal, but still... Any ideas/opinions?
 
aah - the main handle that is is supposed to regulate economy growth. Iirc there's some recent findings (post-2008-crisis) that it's not nearly as efficient a steering device at eco-theorists would have liked it to be. Maybe it only works if we all really believe it to - like the rest of the financial system?  :)

Jakob E.
 
In the UK its main effect has been to reduce mortgage payments thus putting more disposable income in the hands of the working population. The idea is they spend this extra cash on stuff that stimulates the economy. Only problem that retired old folk like me who rely on a decent interest rate to generate income from a lifetime of saving get screwed.

Cheers

Ian
 
Script said:
Are the US going to raise the prime rate in December? And if so, what will happen? Yellen has been talking about it for quite a while now, linking it to the unemployment rate and economic prospect, and I'm sure any raise will be homeopathic (i.e., 0.something percent), meaning not a big deal, but still... Any ideas/opinions?

Yes, unless something even more dramatic than recent events occur the december rate increase is expected and already baked into the markets. In fact if they don't raise the rate then there will probably be a negative reaction from markets.

Curiously (or not) the expectation of a rate increase is already doing some of the work, tightening the monetary supply and slowing growth.  Even a very small interest rate increase will trigger a strong reaction because the expectation is that there will be a series of increases, not just one and done.

The low nominal inflation rate is still a concern (they target 2%) but with the interest rate already at zero there is no where to go should they need to loosen money supply in the future (not strictly true), but prudence suggests they need to start raising interest rates to build up some headroom for future moves and remove that huge distortion to the debt markets and savings rates.

Many retirement accounts have moved from debt into common stocks to get more return than bonds were delivering. So logic suggests the market should drop when retirement money moves back from stocks and into debt. Trouble is the expectation of future interest rate increases makes current debt purchases look unattractive. 

I am repeating myself, I am not a fan of the dual mandate where US central bankers are supposed to manage both employment and inflation rates using the interest rate lever.  It seems logical to manage inflation with money supply, employment is not as directly linked to money supply IMO.

JR

PS: Curiously the interbank rate (24 hr overnight lending) in Germany right now is -0.05%. That doesn't strike me as very healthy, but it's only marginally worse than 0%. 
 
The odd thing about the Fed raising rates is that it will devalue the assests the Fed holds. After several rounds of Quantitative Easing (QE), the Fed has bought Trillions of dollars in bonds. When interest rates rise, the value of bonds falls. So by raising rates, I've read, the Fed will devalue it's own assets.
As these holdings are balancing a substantial part of government debt (i.e. as gov assets go down in value, the dollar amount in the red goes up), it will make the debt picture even worse. 
 
dmp said:
The odd thing about the Fed raising rates is that it will devalue the assests the Fed holds. After several rounds of Quantitative Easing (QE), the Fed has bought Trillions of dollars in bonds. When interest rates rise, the value of bonds falls. So by raising rates, I've read, the Fed will devalue it's own assets.
As these holdings are balancing a substantial part of government debt (i.e. as gov assets go down in value, the dollar amount in the red goes up), it will make the debt picture even worse.
That's not all... The QE (quantitative easing) was the FED buying their own debt, artificially supporting the price (which for debt is interest rates). The sovereign debt market is beyond distorted, but indeed, when interest rates return to normal the nut to service that $18T pile of debt will increase significantly.

Another major drug company just relocated offshore (inverted) to avoid high US tax rates. We desperately need tax reform but it can't happen for another couple years (or longer). 

Don't expect to see a realistic valuation of the national balance sheet... The taxpayer exposure through fannie and freddie is huge and surely not counted as a liability.

JR
 
ruffrecords said:
In the UK its main effect has been to reduce mortgage payments thus putting more disposable income in the hands of the working population. 

I believe this was intended here in Denmark as well - only the result was simply that housing prices raced to match the new level.. Nothing real gained, other than making house owners richer in-theory  ::)

Jakob E.
 
gyraf said:
ruffrecords said:
In the UK its main effect has been to reduce mortgage payments thus putting more disposable income in the hands of the working population. 

I believe this was intended here in Denmark as well - only the result was simply that housing prices raced to match the new level.. Nothing real gained, other than making house owners richer in-theory  ::)

Jakob E.
That is called "wealth effect" and is done on purpose to stimulate consumer spending, when they feel better off.

Unfortunately despite all this monetary intervention we are still bumping along at relatively low inflation rates.  Of course low inflation is better than high inflation, but the larger fear is deflation, which feeds upon itself and can really contract economic activity.

JR

PS: This hard asset inflation has also been pretty good for the stock market.
 
dmp said:
The odd thing about the Fed raising rates is that it will devalue the assests the Fed holds. After several rounds of Quantitative Easing (QE), the Fed has bought Trillions of dollars in bonds. When interest rates rise, the value of bonds falls. So by raising rates, I've read, the Fed will devalue it's own assets.
As these holdings are balancing a substantial part of government debt (i.e. as gov assets go down in value, the dollar amount in the red goes up), it will make the debt picture even worse.

It's all just air and electrons anyway.  Our "collective" sweat equity can never be taxed enough to cover the bill, and all the mortgages they hold would de-value in a massive sell-off as well.  The whole re-fi industry has been a total scam to launder gubdebt while creating a fake industry.
Mike
 
sodderboy said:
dmp said:
The odd thing about the Fed raising rates is that it will devalue the assests the Fed holds. After several rounds of Quantitative Easing (QE), the Fed has bought Trillions of dollars in bonds. When interest rates rise, the value of bonds falls. So by raising rates, I've read, the Fed will devalue it's own assets.
As these holdings are balancing a substantial part of government debt (i.e. as gov assets go down in value, the dollar amount in the red goes up), it will make the debt picture even worse.

It's all just air and electrons anyway.  Our "collective" sweat equity can never be taxed enough to cover the bill, and all the mortgages they hold would de-value in a massive sell-off as well.  The whole re-fi industry has been a total scam to launder gubdebt while creating a fake industry.
Mike
I generally wouldn't give the government that much credit, but an interesting consequence of recent Dodd-Frank changes regarding quality and duration of debt held on bank balance sheets is making US sovereign debt more attractive for those bank balance sheets. So inadvertent or not, more holding by US banks of US sovereign debt.

JR
 
[...] the december rate increase is expected and already baked into the markets. In fact if they don't raise the rate then there will probably be a negative reaction from markets.

Yeah, looking at US stock markets it sure looks like it's baked in already. And it better be raised this time, I think -- not another cliff hanger, please. However, I am also wondering about European markets. From what I read, European indexes are expected to go up with an interest rate increase in the US. I'm not sure I fully understood the argument, but there's so much liquidity in Europe that indexes could indeed be much higher than they are now, purely mathematically speaking, that is, if all that money found its way into the markets, cos apparently many investors have horded loads of cash. Also, a substantial number of European stocks are held by foreign investors, including the US (Black Rock for one).

The low nominal inflation rate is still a concern (they target 2%) [...]

The magic 2%. Same in Europe -- same in Japan. Japan will eventually fire the next QE cannon, it's just a matter of time. And Europe, well, Mr. Draghi has announced probably speeding up QE in December, in anticipation of the US interest rate increase I guess. Meanwhile inflation rate is slightly in the plus in Japan (due to massive yen devaluation, yet the plus in money is not circulating or being distributed effectively), while rates have been going down across Europe this year. Some European countries are effectively in deflation, and no doubt, deflation is not good at all -- it's more than just the opposite of inflation, simply because it stops industry etc from investing. So it tends to put the economy to a halt.

[...] but with the interest rate already at zero there is no where to go should they need to loosen money supply in the future (not strictly true)
Yeah, interest rate could go negative as in Europe. Sounded weird at first, didn't it. Also a "hidden" reality in Japan. A simple example: bank accounts are free and interest is +0.05% or whatever, BUT you pay US$2.50 each time you wire some money. Morgage rates are at low 1%-1,25%. Japanese inflation rate is positive by now, but it doesn't mean much without social change (at least in this country, cos Abenomics have so far not delivered on the third pillar, which actually they can't). Similar thing goes for Europe, I think. Local governments (nations/countries) are too slow in delivering or adapting. 


Many retirement accounts have moved from debt into common stocks to get more return than bonds were delivering. 
That's in the US, not so in Europe. Looking at statistics reveals that, after the last two "big" crashes (dotcom and Lehman), too many people have entirely turned their backs on the stock markets or any form of investment. To me it seems that Americans are much more rational (and smart) when it comes to money, moneymaking and markets than Europeans, who prefer insiduous loss in purchasing power (simple bank account interest) to risk taking (investment). Of course, there's no free lunch and holding an investment requires spending some time (actually quite some time) reading about and observing the markets etc. Looks like not many Europeans find that attractive enough. Instead, there seems to be a latent perfidious wish to see world markets crash. I don't get it.

Europe is also a good example that QE and lowering the interest rate does not necessarily result in instant change. Again, local governments are slow/stubborn. And yes, Germany is a really funny example, cos the government there regularly issues new state bonds with negative interest/yield rate (buyers accept overall loss at time of purchase already!) and they successfully sell them at next to no time. Germany really is the biggest benefitor of Draghi's monetary policy.
 
Script said:
[...] the december rate increase is expected and already baked into the markets. In fact if they don't raise the rate then there will probably be a negative reaction from markets.

Yeah, looking at US stock markets it sure looks like it's baked in already. And it better be raised this time, I think -- not another cliff hanger, please. However, I am also wondering about European markets. From what I read, European indexes are expected to go up with an interest rate increase in the US. I'm not sure I fully understood the argument, but there's so much liquidity in Europe that indexes could indeed be much higher than they are now, purely mathematically speaking, that is, if all that money found its way into the markets, cos apparently many investors have horded loads of cash. Also, a substantial number of European stocks are held by foreign investors, including the US (Black Rock for one).
When the US finally raises interest rates the US dollar will get even stronger (I EURO= $1.06). This will make goods priced in other nation's currencies cheaper and more attractive. 
The low nominal inflation rate is still a concern (they target 2%) [...]

The magic 2%. Same in Europe -- same in Japan. Japan will eventually fire the next QE cannon, it's just a matter of time. And Europe, well, Mr. Draghi has announced probably speeding up QE in December, in anticipation of the US interest rate increase I guess. Meanwhile inflation rate is slightly in the plus in Japan (due to massive yen devaluation, yet the plus in money is not circulating or being distributed effectively), while rates have been going down across Europe this year. Some European countries are effectively in deflation, and no doubt, deflation is not good at all -- it's more than just the opposite of inflation, simply because it stops industry etc from investing. So it tends to put the economy to a halt.
It will be interesting to see US and EURO zone (world) moving in opposite directions wrt monetary policy.
[...] but with the interest rate already at zero there is no where to go should they need to loosen money supply in the future (not strictly true)
Yeah, interest rate could go negative as in Europe. Sounded weird at first, didn't it. Also a "hidden" reality in Japan. A simple example: bank accounts are free and interest is +0.05% or whatever, BUT you pay US$2.50 each time you wire some money. Morgage rates are at low 1%-1,25%. Japanese inflation rate is positive by now, but it doesn't mean much without social change (at least in this country, cos Abenomics have so far not delivered on the third pillar, which actually they can't). Similar thing goes for Europe, I think. Local governments (nations/countries) are too slow in delivering or adapting. 
The US desperately needs to reform corporate tax policy to reduce the exodus of US corporations escaping to lower tax nations (inversion). Everybody agree that we need reform, but not what that reform should be. Hopefully after this next election we can fix this leak in the bottom of the tax revenue boat. If not I see more gradual deterioration of tax base.
Many retirement accounts have moved from debt into common stocks to get more return than bonds were delivering. 
That's in the US, not so in Europe. Looking at statistics reveals that, after the last two "big" crashes (dotcom and Lehman), too many people have entirely turned their backs on the stock markets or any form of investment. To me it seems that Americans are much more rational (and smart) when it comes to money, moneymaking and markets than Europeans, who prefer insiduous loss in purchasing power (simple bank account interest) to risk taking (investment). Of course, there's no free lunch and holding an investment requires spending some time (actually quite some time) reading about and observing the markets etc. Looks like not many Europeans find that attractive enough. Instead, there seems to be a latent perfidious wish to see world markets crash. I don't get it.
I worry about all the derivative market index products being sold and traded like stocks. These are not stocks and too much concentration in them could end badly. 

I am not a fan of increased regulation but I do appreciate reading about arrests made of high speed traders who spoof or phish for price advantage by placing and immediately canceling a large number of trades to win a slender price advantage. These high speed traders are skimming wealth from all the long term investors.
Europe is also a good example that QE and lowering the interest rate does not necessarily result in instant change. Again, local governments are slow/stubborn. And yes, Germany is a really funny example, cos the government there regularly issues new state bonds with negative interest/yield rate (buyers accept overall loss at time of purchase already!) and they successfully sell them at next to no time. Germany really is the biggest benefitor of Draghi's monetary policy.
Yes we've discussed this before... Germany as a major exporter benefits from a weak Euro. If Germany was using a single country currency, things might be very different. I am watching how VW fares. In Germany AFAIK you can't file criminal charges against a company, individuals have to be held responsible, Surely the company will have to pay the fines, because individuals don't have that much money. Since VW is party owned by the government they will be fining themselves.

JR
 
JohnRoberts said:
When the US finally raises interest rates the US dollar will get even stronger (I EURO= $1.06). This will make goods priced in other nation's currencies cheaper and more attractive. 
Actually, I expect the EUR/USD exchange rate to be 1 to 1 or even lower at something like EUR0.95=USD1 in early 2016, if QE in the EU continues at that fast a pace (and it probably will) or even faster (waiting for Thursday this week). Indeed not bad for EU export companies (esp. when priced in USD, and probably add Chinese Yuan soon).

However, I’m not so sure about stock markets. Even if EU stocks “look” cheap, there is the exchange rate risk for non-EURO-based investors. What could easily happen is that, in the mid run, stock prices in the EU go up further (majority of companies is “fairly” priced at the moment, I think – and markets in Europe are not euphoric), but it will mostly be driven by derivatives and foreign investors (exactly what happened in Japan, I suspect), and then continue along a high-level and highly volatile trajectory (up 10% today, down 10% tomorrow, and so forth, absorbing QE money). Not so attractive for longer-term investors – unless “bought cheap so forget”-strategy.

The US desperately needs to reform corporate tax policy […]
In Japan they are talking about lowering domestic corporate tax to create incentive for companies to move their offshore production sites back to Japan. However, AFAIK, not a single Japanese company has done that yet – despite massive yen devaluation.

Yes we've discussed this before... Germany as a major exporter benefits from a weak Euro. If Germany was using a single country currency, things might be very different.
Not only as an exporter, but WRT interest rate in restructuring their debts: stop making new debts and/or keeping stable and, ideally, even reducing liabilities. Unfortunately, it’ll take many EU countries much longer, so the ECB will continue QE simply to buy time for local governments to finally get their acts together.

A single country currency in any European country not only runs totally counter to that idea, it will also diminish the EU’s overall (and most probably also that specific country’s) importance on the world map. Maybe, for some people, living in a marginal village with an inflation-triggered, imploding economy is the best that can happen. And maybe the game is already lost anyway (I’m thinking China and East Asian countries [ex Japan] as the next centres of world-leading economies -- it’s just a question of how far behind and how quickly the EU and the US will fall, I think 2050 is a good projection for the “Race over”), so why not accelerate the process today and blow up the EU? Though, attention everybody please, better grab your chairs really tightly as the taxman will sure come to take it. Who will benefit most from a future single-country currency? Those same people (in that very country) who hold most of the money today. The biggest chunk of the bill will be paid by the vast majority – and in far more unfavourable proportion than might be the case now (that is, surge in unemployment, paired with cuts in public spending – dark times ahead that’d be).

Frankly, I can't be bothered about Volkswagen. But the government sueing and fining itself? That's funny. They should go for it and thus recompensate all those people who now probably have to pay higher automobile tax ;)

And one from Japan for the laugh:
Japan had raised VAT last year, with the next increase in preparation. And now the joke: the Japanese government has just issued personal “VAT payback cards” to every citizen to be used/shown at counters when shopping. Then, at the end of the fiscal year, people can claim back some of the paid VAT they “collected”. Of course, gov is hoping that people forget carrying their cards with them and showing it all the time. Crazy what bureaucrats dare to come up with. The last “crazy” Japanese joke was much more fun. A couple of yers ago, all taxpayers in Japan got wired approx. USD100 into their private account by the tax office (i.e., dropping money by helicopter). This didn’t change the overall course of the economy, cos they maybe didn’t wire enough money and people didn’t spend it, but they liked it anyway -- it uplifts the spirit ;) Wouldn't that be an idea for Europe?
 
Script said:
JohnRoberts said:
When the US finally raises interest rates the US dollar will get even stronger (I EURO= $1.06). This will make goods priced in other nation's currencies cheaper and more attractive. 
Actually, I expect the EUR/USD exchange rate to be 1 to 1 or even lower at something like EUR0.95=USD1 in early 2016, if QE in the EU continues at that fast a pace (and it probably will) or even faster (waiting for Thursday this week). Indeed not bad for EU export companies (esp. when priced in USD, and probably add Chinese Yuan soon).
likely... I'm not smart enough to trade currency. But outlook for dollar with increasing interest rates is up, up, and away. For better and worse...
However, I’m not so sure about stock markets. Even if EU stocks “look” cheap, there is the exchange rate risk for non-EURO-based investors. What could easily happen is that, in the mid run, stock prices in the EU go up further (majority of companies is “fairly” priced at the moment, I think – and markets in Europe are not euphoric), but it will mostly be driven by derivatives and foreign investors (exactly what happened in Japan, I suspect), and then continue along a high-level and highly volatile trajectory (up 10% today, down 10% tomorrow, and so forth, absorbing QE money). Not so attractive for longer-term investors – unless “bought cheap so forget”-strategy.
I have not been bullish on EU economy for a long time. Perhaps a little short term relative value, but investments need to make sense long term. EU is supplanting low birth rate with immigrants, but the new comers don't seem very european.
The US desperately needs to reform corporate tax policy […]
In Japan they are talking about lowering domestic corporate tax to create incentive for companies to move their offshore production sites back to Japan. However, AFAIK, not a single Japanese company has done that yet – despite massive yen devaluation.
I haven't been paying close attention to Japan. Don't you have a major demographic problem with an aging population (not enough young workers)? I just saw an article about Exoskeletal lift support machinery used by a japanese company, so older workers can still lift heavy weights (again because not enough young workers to do the heavy lifting).

China has even liberalized their one child policy, worrying about running out of workers. I would have worried about running out of women a lot sooner since so many girl babies got aborted.
Yes we've discussed this before... Germany as a major exporter benefits from a weak Euro. If Germany was using a single country currency, things might be very different.
Not only as an exporter, but WRT interest rate in restructuring their debts: stop making new debts and/or keeping stable and, ideally, even reducing liabilities. Unfortunately, it’ll take many EU countries much longer, so the ECB will continue QE simply to buy time for local governments to finally get their acts together.
If ?
A single country currency in any European country not only runs totally counter to that idea, it will also diminish the EU’s overall (and most probably also that specific country’s) importance on the world map. Maybe, for some people, living in a marginal village with an inflation-triggered, imploding economy is the best that can happen. And maybe the game is already lost anyway (I’m thinking China and East Asian countries [ex Japan] as the next centres of world-leading economies -- it’s just a question of how far behind and how quickly the EU and the US will fall, I think 2050 is a good projection for the “Race over”), so why not accelerate the process today and blow up the EU? Though, attention everybody please, better grab your chairs really tightly as the taxman will sure come to take it. Who will benefit most from a future single-country currency? Those same people (in that very country) who hold most of the money today. The biggest chunk of the bill will be paid by the vast majority – and in far more unfavourable proportion than might be the case now (that is, surge in unemployment, paired with cuts in public spending – dark times ahead that’d be).
Again I am not smart enough but I wouldn't rule out Africa as the next rising economic power (I don't know why they skipped South America?).
Frankly, I can't be bothered about Volkswagen. But the government sueing and fining itself? That's funny. They should go for it and thus recompensate all those people who now probably have to pay higher automobile tax ;)
I'm watching for the conflict between reality and group hug thinking. The reality is a very expensive mess that they can't simply mandate away. (While I'm repeating myself I'd figure out a way to trade for emissions reductions elsewhere.  Just leave the cars as is. ) 
And one from Japan for the laugh:
Japan had raised VAT last year, with the next increase in preparation. And now the joke: the Japanese government has just issued personal “VAT payback cards” to every citizen to be used/shown at counters when shopping. Then, at the end of the fiscal year, people can claim back some of the paid VAT they “collected”. Of course, gov is hoping that people forget carrying their cards with them and showing it all the time. Crazy what bureaucrats dare to come up with. The last “crazy” Japanese joke was much more fun. A couple of yers ago, all taxpayers in Japan got wired approx. USD100 into their private account by the tax office (i.e., dropping money by helicopter). This didn’t change the overall course of the economy, cos they maybe didn’t wire enough money and people didn’t spend it, but they liked it anyway -- it uplifts the spirit ;) Wouldn't that be an idea for Europe?
Don't japan companies give workers a large bonus once a year, that they would use to buy appliances and whatever? The public is always excited by getting a lump of cash, even if it is just their own money.

JR
 
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