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Old 08-04-2002, 04:19 PM
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Default interest rates

many people think that raising or lowering rates by the fed. really matters much. it doesnt. its the trend that counts. and that is determined by the market. not the stock market. the interest rate market. companies make their loan decisions on expanding for the future by the trends and not by single responses. so if the trend is down it should overall lead us into a recovery. but it doesnt always happen for a very long time. look at japan. they lowered rates to almost nil and it hasnt done a thing.

what determines prosperity is production and efficiency. not much more. short term say 50 or 100 years you can maintain a high standard of living by depleteing natural recources but that doesnt last as we have seen in some places.
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Old 08-05-2002, 02:39 AM
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Default Re: interest rates

Excellent point Ray, no one ever gets to borrow money at the Fed Funds rate! It does have some effect however, since prime rates are set off of it and most bank loans are written with some add on to prime, such as prime + 100 basis points. When bonds are traded, it is indeed the market's setting. Bank loans do play an important role in the economy so we can't write off the Fed's work as totally meaningless, but it is indeed not a 100% correlation by any means.

An interesting concept has emerged the last few months that I find quite strange. Seems that people are looking for the Fed to determine things for them, instead of the markets determining pricing and future expectations and having the Fed react to them. The upshot right now is that a lowering of the rates by the Fed might actually have an opposite result. For some reason the markets seem to be looking for any positive signs about the economy from the Fed. If the Fed lowers the rates, people will see that as a negative sign from the Fed and hammer the economy down. I don't see a lowering of rates doing any real good right now and think it would be unwarranted. Banks don't lack the money to lend, they just are afraid to do it. I don't think giving them an extra 25 or 50 BP as a spread is going to get them to overcome their fears. I don't think businesses are sitting idle on projects that would suddenly become viable with a small cut in the interest rate. Right now everyone agrees the problem is capital spending and business investment. Those are usually very sensitve to lending rates, but I think they are past that point right now because the hurdle rates are so low. In other words if you are a business owner and you look at projects, you are talking about a maybe 5% loan rate, after tax. There are probably tons of projects you could do that you would think could cover your cost of capital. However you are too uncertain about business trends to take the plunge. If suddenly the rate was 4.5%, that would mean absolutely nothing, in fact the lower rate probably would be offset because of the negative effects of people fretting even more about the economy. That is where the problem lies and why lowering rates will do nothing to kick start the segment of the economy that everyone is looking for a recovery from.

The Fed really just needs to sit still and take its time right now. I get a sense that they are exactly of the same mindset as me. They see that all is not doom and gloom and that a slow but steady recovery that gains strength in small steps is what the country needs, not a quick bounce back that creates unrealistic future expectations and possibly gets another bubble mentality going.

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Old 08-06-2002, 05:45 AM
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Default bond market speaking loud and clear

"Seems that people are looking for the Fed to determine things for them"

by your logic its ok if the fed is behind the curve on the economy. it would be nice if greenie was more than a govt spin master. ill admit that its much easier for fed to be effective enacting restrictive monetary policy to slow down economy than to be effective in an accomodative policy to spur growth. major credit crunch in corporate bond market, wonder why ha ha?

"instead of the markets determining pricing and future expectations and having the Fed react to them."

bond market telling greenie to cut interest rates. 2 year treasury bond is at 1.87%. the rally in the 2 year treasury bond is the story of the year imo. yield curve from 2-10 is super steep, from 0-2 flat.
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Old 08-06-2002, 03:30 PM
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Default Re: bond market speaking loud and clear

I don't get your logic. The curve is steep, shouldn't that mean he should RAISE rates? A steep curve implies that the market expects a rise in interest rates (or inflation) in the somewhat near future, why would you go out and cut rates and exaggerate the curve more???

I am sorry, I am not convinced right now of the need to lower rates. When any change right now takes effect, around March of next year, there is likely to be nothing but an overly stimulative effect on the economy. While the Fed would like to get the economy going, I don't think an argument can be made for taking a major risk at pretty bad inflation for next year. Right now the Fed Funds is below worldwide rates everywhere except Japan and going lower will only exacerbate future inflation, especially since it likely will send the dollar lower over the short term. I have read some of the research notes sent out with these predictions of the rate cuts and I am not sold. They don't look like they really took any economy considerations into effect, they read more along the lines of the need to cut rates is so the stock market can get a floor underneath itself and then an improved market will lead to a better economy. Terrible thinking, the Fed is completely following bad policy if that is how they make decisions so hence I am not so sure that they will appease the market and make the cut.
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