[HN Gopher] Federal Reserve slashes interest rates to zero
___________________________________________________________________
Federal Reserve slashes interest rates to zero
Author : ncw96
Score : 137 points
Date : 2020-03-15 21:04 UTC (1 hours ago)
(HTM) web link (www.washingtonpost.com)
(TXT) w3m dump (www.washingtonpost.com)
| [deleted]
| josiahtu wrote:
| Imagine if Trump had tried as hard to contain coronavirus as he's
| trying to pump markets rn
| Animats wrote:
| I have to agree. A full lockdown of the country with a return
| to normal at the speed China achieved would do more than
| fooling around with interest rates. In the current situation,
| there's not much productive a business can do with more loans
| anyway.
| colinbartlett wrote:
| My "high interest" savings accounts already took a recent haircut
| and this will accelerate that. I understand that's the idea: make
| investing attractive and savings unattractive. But for a regular
| joe like me, this is exactly the time I want to be saving more so
| it stings.
| perl4ever wrote:
| What do you think is the difference between saving and
| investing??
| nightski wrote:
| Saving is preservation of capital whereas investing is
| growing capital. At least that is my take.
| jkraker wrote:
| I moved some of my high yield savings account into a 12 month
| CD recently to maintain a more tolerable interest rate for the
| next 12 months while the savings account interest rate
| inevitably tanks. That means I can't touch it for 12 months if
| I want the interest, but I was careful with the amount I put in
| the CD so that I will most likely not have to touch it.
|
| This should in no way be construed to be advice because I'm
| unqualified to give it. It's just an option.
| auntienomen wrote:
| This may well be a good time to buy low. Take the interest rate
| hit for a few months and be happy you have cash on hand when
| opportunity knocks.
| coretx wrote:
| The EU is printing more EUR, helping everyone. The USA is
| lowering the interest, helping the ultra rich.
| phkahler wrote:
| IMHO this is a really bad idea. Let's hope they raise them slowly
| this time, unlike 2007-8 when they went back up quickly and
| triggered mayhem.
| michaelyoshika wrote:
| Don't know why this is downvoted. Cutting interest only
| benefits the wall street in the next couple months. Basically
| this admin only knows two things: 1, Cut interest rate 2, Cut
| tax And it doesn't care if the world explodes after they step
| down.
| imglorp wrote:
| Most republican administrations have displayed that "get mine
| and get out" behavior--causing recessions--since Teddy
| Roosevelt.
| dcftoapv wrote:
| Obama's admin let one of the world's foremost financial
| institutions fail and caused a mass market panic / giant
| economic setback. Their reasoning was entirely political
| and caused millions of people to lose their jobs. I'm
| independent, but claiming that Republicans cause recessions
| is pretty ironic considering the economic damage the last
| Democratic admin did.
| imglorp wrote:
| In that case, the recession began during Bush, who
| provided the first bailout around $800B. Obama did
| another bailout of similar amount.
|
| I was talking about starting recessions, not digging out
| of them, so my statement holds.
| HaloZero wrote:
| Which financial institution are you referring to here?
| [deleted]
| dcftoapv wrote:
| This is not going to help
|
| - It takes two years for monetary supply changes to fully
| propagate through the economy
|
| - Cutting rates to 0% has not been effective in Japan or Europe
|
| The fed does have a role to play here
|
| - They can provide liquidity to the market
|
| - They can serve as a backstop in a time of crisis
|
| DC needs to get their shit together
|
| - Eliminating Trump's tariffs would do more to increase long-term
| investment than cutting rates to 0%
|
| - They should have created targeted lending program to help
| businesses that need short-term cash flow assistance yesterday;
| the next best time to do it is right f __*ing now
| paganel wrote:
| As someone said before, I think this is more about sending a
| message, as in "we're going to do whatever it takes". To be
| honest I don't know what the future will hold from a
| financial/economics point of view, but imho this is an once-in-
| a-century crisis.
| dcftoapv wrote:
| You're right, and they made a lot of changes that are
| necessary to keep the global economy functioning over the
| next few months. I did not mean to imply that they shouldn't
| be taking action.
|
| I am very skeptical about cutting rates again. There are much
| more effective actions that could be taken at the policy
| level. The fed is doing what it can, but it doesn't have the
| right tools to lead the charge on this.
| paganel wrote:
| Yeah, this should definitely be teamed up with
| corresponding fiscal and trade policies, the Fed cannot
| sort all of this mess by itself.
| aazaa wrote:
| The Fed can, and will do much, much more. The signal here should
| be read as "whatever it takes to avoid a depression."
|
| Among other steps, this is likely to mean:
|
| - Negative-yielding long-term treasuries
|
| - Direct purchase of stocks or ETFs, which would require
| congressional approval. Expect the discussions to start soon.
|
| The steps already taken and the ones to be taken will create
| financial manipulation on a scale never before seen.
|
| If the Fed loses this fight, game over.
| internet_user wrote:
| Why can't they just spin up an LLC that would buy stocks/ETFs
| and just write loans to it?
|
| Why would that need congressional approval? Seems like exactly
| what they've done with Maiden Lane LLC
| thoughtstheseus wrote:
| They went through a bank, JPMorgan. The fed can lend to banks
| so they could execute equity purchases if they found a
| partner bank to actually do it.
| fourstar wrote:
| > If the Fed loses this fight, game over.
|
| They've already lost it. It's clear they're scrambling. You
| can't print your way out of this is the lesson we KNEW from
| '08.
| adventured wrote:
| > You can't print your way out of this is the lesson we KNEW
| from '08.
|
| Printing our way out of 2008-2010 is exactly what we did that
| worked, and it's what Europe mostly didn't do and their
| results were terrible by comparison (leading to another bad
| recession a few years later, after which the ECB finally
| learned a lesson; and finally after that, Europe began to
| properly recover, including countries hardest hit like Spain
| and Portugal).
|
| The Fed's balance sheet makes this exceptionally clear:
|
| https://i.imgur.com/QbF5jzJ.png
|
| It took the Fed a short amount of time to ramp up the
| programs, including eventually moving on to QE. And it worked
| just fine.
|
| See that epic balance sheet expansion in 2013 and 2014?
| That's the Fed avoiding what hit Europe. That's the Fed
| further printing our way out of the mess. It's how the US
| economy kept expanding for ten years.
|
| You can in fact use the Fed to debase USD-based productivity
| + assets and then redirect those resources in a concentrated
| manner at a problem, such as the housing market. The Fed can
| take a trillion dollars from every holder of dollars and
| dollar assets, and put that trillion dollars toward a
| problem. This only stops working if the USD has no value (or
| in more realistic terms, if the USD loses very immense
| amounts of value, becoming mostly worthless, which makes the
| dollar debasement & redistribution efforts lose their punch).
|
| The Fed bought all the toxic mortgages. They recapitalized
| the banks, keeping the majors and the real-estate market from
| collapsing under the weight of trillions in junk mortgages.
| They largely removed those mortgages from the market, which
| very rapidly helped the housing market begin to stabilize and
| turn around.
|
| They successfully directly bailed out homeowners to the tune
| of trillions of dollars and reinflated the housing market and
| the stock market via low interest rates.
| grecy wrote:
| > _Printing our way out of 2008-2010 is exactly what we did
| that worked_
|
| Have a look at any country in history that printed it's way
| out of trouble, and see how that worked out for them in the
| longer term.
|
| Zimbabwe is a good recent one to look at.
| postingawayonhn wrote:
| > Printing our way out of 2008-2010 is exactly what we did
| that worked
|
| It was always just a band-aid. The reason the Fed has had
| to take interest rates so low now is that they were unable
| to raise them during the lastest 'boom'.
| fourstar wrote:
| Came here to reply with the same thing. Not sure who is
| downvoting me but my guess is people who weren't around
| back in '08 or are significantly out of touch with US
| economic policy (or general econ policy, that is).
|
| If you've downvoted me then you probably need to watch
| this: https://www.youtube.com/watch?v=PHe0bXAIuk0.
|
| This is a wet band-aid.
| adventured wrote:
| It'll continue to be a band-aid, of course. Band-aids are
| useful.
|
| It's the Japanification of the US economy, including a
| similar Federal debt problem (which is the single biggest
| reason the Fed can never raise rates back to a normal
| level again).
|
| Japan still has a highly functioning country and
| functioning economy (one of the wealthiest and most
| productive on earth), even though their central bank
| policies and debt situation are an enormous mess.
|
| The US has a lot of household wealth (~$100-$110
| trillion) that the Fed can debase on a perpetual basis,
| as a never-ending band-aid. Then there is all the other
| dollar based wealth around the world. They can run a
| never-ending $80 billion per month QE program and it'll
| barely scratch the massive US asset base (which over
| time, averaged, may well outgrow a trillion dollar per
| year debasement). Ideally you want to see the US
| Government bring its irresponsible fiscal situation under
| control, sooner than later, so that approach doesn't have
| to go on for 30 or 50 years (but nobody is going to hold
| their breath for that). The counter is to point out that
| foreign actors will pull their confidence in the USD
| during this process (increasing the real cost for the Fed
| to keep doing it), whether after 10, 20, 50 years - and
| that may well happen, but it's impossible to forecast
| when. This is especially true given the currency
| competitors are all a mess as well, with China overloaded
| with debt, Japan in far worse shape than the US, and the
| Eurozone with no growth and their own miscellaneous debt
| & economic problems.
| Anon84 wrote:
| What does game over mean in this context?
| pishpash wrote:
| Total financial collapse, asset holders wiped out.
| mcphilip wrote:
| Interesting that S&P futures have fallen 3% as of 5:00pm in
| Asia. Are markets interpreting this less as the Fed signaling
| it will do whatever it takes and more as the Fed is panicked
| and the financial system is under a huge amount of pressure
| behind the scenes?
|
| Edit: S&P futures limit down at 5:15.
| vsareto wrote:
| The only alternative reason is that the Fed is simply giving
| in to Trump's demand.
| dcftoapv wrote:
| The problem is that fed action isn't enough. We need policy
| changes to keep SMEs above water. The White House and
| Congress have not taken appropriate action. Trump acted like
| he was going to take action on Friday, the markets ripped
| higher, and everything he announced was worthless, but that
| wasn't clear until markets closed.
| blihp wrote:
| A significant fraction of the economies of the world are
| being shut down, which is what needs to happen short term.[1]
| Interest rate cuts and liquidity injections won't do much of
| anything about the fact that, other than mostly small ticket
| essentials, no one is buying, no one is selling and no one is
| producing much right now. At the very least, this quarter is
| shot and markets are just trying to price in what stalling
| out the economy is going to mean.
|
| [1] If you disagree, picture this scenario: everyone went
| about their business as usual, vastly larger numbers of cases
| are reported with corresponding deaths, the public starts to
| panic... and economies are still shutting down but due to
| fear.
| csense wrote:
| Does anyone here understand how negative interest rates would
| work?
|
| Why would anyone buy a negative-rate treasury bond instead of
| just hanging on to their cash?
| dcftoapv wrote:
| We used to think that rates couldn't go negative for exactly
| the reason you just described.
|
| Turns out that assumption was wrong for a few reasons a)
| holding onto money is expensive b) in many cases banks have
| incentive to hold government securities c) sometimes they are
| outright required to hold government securities d) this is
| related to (a), but there is risk in holding onto cash where
| government debt is in many cases perceived as risk-free.
|
| The thought today is that rates can go only slightly negative
| for short periods of time, which we will continue to believe
| until some government tries to push the lower bound again.
| csense wrote:
| So people are willing to accept small negative rates if it
| would be less than the operational costs of shipping
| enormous truckloads of bills around, storing them, securing
| them, and insuring them against theft / fire? Is that's
| what's going on here?
| dcftoapv wrote:
| That's kind of the thought, yes. Negative rates should
| not be sustainable for any significant period of time and
| most interest rate models are built on that assumption.
| auntienomen wrote:
| If you have a large amount of money (e.g., you are a mutual
| fund), banks will charge you to hold it.
| inferiorhuman wrote:
| _If the Fed loses this fight, game over._
|
| This isn't the Fed's fight. Monetary policy won't fix this.
| onlyrealcuzzo wrote:
| A lot of people seem to think the Fed's job evolved to
| include preventing recessions.
|
| I guess the Fed isn't accountable to the US public, so their
| job can be whatever they want it to be?
| [deleted]
| dcftoapv wrote:
| The feds mandate is to maximize employment, stabilize
| prices, and moderate long-term interest rates.
|
| A big part of that is trying to avoid the 'bust' part of a
| boom-bust cycle.
|
| As evidenced by your post, the fed should not be
| accountable to the public because the public cannot be
| expected to spend anytime trying to understand what they do
| and their methods of action.
| [deleted]
| cle wrote:
| Any body holding significant power is at some level
| accountable to the public, regardless of laws or
| regulations or how little the public may understand. If
| the Fed can't make the case to most citizens that it
| should exist and retain its power, then it is doomed, and
| no philosophical arguments could change that.
| taiwanboy wrote:
| Game over is an exaggeration. There's 3.4 trillion sideline
| cash. China's economy collapsed 80-90% in the last month and
| will take months to recover, on top of exploding debts. Japan
| and Germany was in recession before coronavirus hit.
|
| On the other hand, US was growing a steady 2% and had record
| low unemployment before this. If US can flatten the curve,
| with only ~3000 cases thus far, US will recover quickly and
| come out way ahead. And the sideline cash will rush into US
| ineedasername wrote:
| Precisely. This isn't an issue driven by obscure and multi-
| layers investment vehicles that can't survive when stressed.
| This is a decrease in the market driven by actual
| significantly reduced consumption and demand for a wide
| variety of services. The Fed keeping things liquid is
| important, as are things like low interest loans to small
| businesses. But it doesn't matter how cheap your credit is if
| you don't actually have any revenue coming in. Monetary
| policy will (hopefully) help keep the economy from complete
| disaster while the underlying issue is resolved, but that's
| the most it can do.
| simonh wrote:
| This is correct, the financial system is actually fine. Banks
| are well capitalised and stable. The problems are cash flow
| for businesses, incomes for low income and hourly wage
| earners, and health care for huge swathes of Americans.
|
| The fed has an important role to play of course, but they're
| really a sideshow this time around.
| mindcrash wrote:
| >the financial system is actually fine. Banks are well
| capitalised and stable.
|
| No they are not. Most big European banks are technically
| bankrupt. Most big American banks are technically bankrupt
| too. The only reason people in general do not know about
| this is because they used a lot of financial tricks to make
| it look like they are healthy.
|
| In fact, Deutsche Bank very likely had to announce that
| they are bankrupt this very month due to the fact they
| never learned from the former crisis causing a shockwave
| throughout the entire financial market worldwide, if not
| for COVID. Now they can just blame COVID when the entire
| financial system tanks.
|
| Here's a video explaining what has been going on in Europe
| all these years. It will not be different for the United
| States (or certain parts of Asia for that matter) ->
| https://www.youtube.com/watch?v=Cu6Em4a4pG4
| ajross wrote:
| > whatever it takes to avoid a depression
|
| Does the Federal Reserve Bank do vaccines, now? This isn't a
| financial crisis. Money won't fix it. People aren't transacting
| in big chunks of the economy because they're immobilized by a
| plague.
|
| Now... certainly once the virus is under control, economic
| recovery is going to depend on finance and liquidity, so it's
| not like the Fed has no role to play. But... it's not the Fed's
| fight to "lose". Until case counts are down and infection risk
| is negligible, we're looking at a depression regardless.
| jgalt212 wrote:
| > If the Fed loses this fight, game over.
|
| Only in the sense that the fate of the world rests in inflated
| asset prices. That's not to say actions of the Fed cannot
| stabilize the markets, which is very important. But if the
| world is scared and scared for a long time (demand shock),
| there's not much the Fed can do. Then it will come down to
| whether or not the USG can become the "consumer of last resort"
| via fiscal stimulus.
| taiwanboy wrote:
| The government can simply ban shorts, much like 2008, and what
| other European stock markets have done already. That would kill
| the shorts dead in its tracks. Then the stock market would
| stabilize, in time for businesses to stabilize and hopefully by
| summer everything will be recovery focused.
| AznHisoka wrote:
| What if stocks dropping was mostly due to people selling
| their holdings?
| dharma1 wrote:
| Direct purchases of shares will do little to alleviate this
| crisis.
|
| The treasury purchases will fund the government to help
| industries which are badly affected from going under, companies
| with cash flow issues, and employees who need to take time off
| - which they already announced on Friday. I think $500b will be
| the beginning, will likely be much more needed
| dcftoapv wrote:
| Asset purchases will help to stabilize markets
|
| - The fed became a huge driver of liquidity from from
| 2016-2018
|
| - There was a noticeable increase in market toxicity when
| they started letting assets roll of their balance sheet in
| 2018
|
| I'm more optimistic about the impacts of their role as a
| liquidity provider than I am about their role holding down
| the effective overnight borrowing rate.
| dnautics wrote:
| Are you optimistic about the wealth transfer implications
| of their activity?
| dcftoapv wrote:
| Look, I don't want to be alarmist, but the worst outcome
| here is not '08. It's the 1930s. This has caused material
| demand and supply side shocks that we haven't seen in my
| lifetime or my parents' lifetime.
|
| I'm likely on the younger side of the hacker news
| demographic and I still believe that this is the right
| action to take at this moment.
|
| We might be stuck paying it off for awhile, but I would
| rather deal with an inflated fed balance sheet than an
| entire generation of Americans coming of age during a
| giant economic pullback.
| majos wrote:
| Dumb question: does this mean normal citizens can take out loans
| at near-0% interest, or something close to that? I know credit
| card interest rates are typically tied to "the fed rate" but a
| but higher?
| kurthr wrote:
| I think they're usually tied to the prime rate, but the spread
| is usually 13% or more. Prime, in turn is usually 2-3% above
| the fed funds. So you might find a CC with rates as low 15%!
| perl4ever wrote:
| No, because the expense of processing loans becomes more
| significant the lower interest rates go.
|
| It's like people complain about gas prices not dropping as much
| as the price of oil, ignoring that the non-oil costs largely
| don't go down.
|
| Also, as something I read pointed out, the fact that people are
| rushing to "risk free" debt doesn't mean they are equally
| rushing to loan money to you, which has _some_ risk.
|
| So for both reasons, consumer loans aren't dropping as much as
| you'd hope.
| [deleted]
| [deleted]
| bluedevil2k wrote:
| The Fed rate is the interest rates that the Fed pays banks for
| their deposits in the Fed. By lowering it, they're
| incentivizing the banks to loan the money and provide liquidity
| into the market. Since banks need to make a profit on
| everything, they'll loan the money out at a higher rate for
| things like mortgage, car loans, and credit cards. Depending on
| the credit worthiness and the collateral, the rates will differ
| (mortgage lower than an unsecured credit card). Ultimately, the
| Fed lowering the rates will lower all interest rates, but
| you'll never get to 0% as a consumer.
| xxpor wrote:
| >but you'll never get to 0% as a consumer.
|
| Unless we see negative fed rates. Not that I think going so
| negative we see consumer level 0% mortgages is likely.
| jaggederest wrote:
| Ironically, much of the tax advantage of owning vs renting
| is embodied in the mortgage interest tax deduction. If
| there were no interest, obviously it would be a good deal,
| but would not have the additional benefit of tax avoidance
| that it does at present.
| dlp211 wrote:
| Much of the tax avoidance from primary residence property
| has been removed from the tax code already due to the
| TCJA. Not all of it, but most of it. It also makes no
| sense to have a mortgage for the tax break. Rentals have
| depreciation and the interest remains deductible as an
| expense on them there, so that isn't really an issue.
| tjomk wrote:
| Take a look at Europe with negative rates. Every bank has a
| statement that if the rate goes below 0 your effective rate
| will still be above that.
| brianpgordon wrote:
| One note... what you're describing is the IOER rate, not the
| fed funds rate. But other than that you're spot on.
| thebeardisred wrote:
| You'll never get zero on _some_ products. Retailers utilize
| low interest rates to provide "direct" financing to
| incentivize purchases at their stores. This is often provided
| as a "promotional"[1][2] rate with the hope that it will spur
| purchasing in the short term and then make money on the
| financing in a longer timeline. Often this is done at stores
| which sell "durable goods" (e.g. appliances or automobiles).
| The takeaway? You can absolutely get 0% as a consumer, as
| always though there is fine print.
|
| [1]: https://www.mymoneyblog.com/be_careful_of_0.html [2]:
| https://www.edmunds.com/car-loan/what-you-need-to-know-
| about...
| myoon wrote:
| No, this is the fed fund rate, which is just for banks to
| borrow really short term (overnight usually) to each other.
| Most consumer loans are based on the prime rate, which has a
| few points added to the fund rate to cover the cost of
| borrowing.
| apta wrote:
| Would someone be able to negotiate a 0% loan with a bank you
| think?
| mandelbrotwurst wrote:
| Not unless it's bundled into some other set of services
| with profit for the bank attached.
| dcftoapv wrote:
| Adding some further nuance to this point:
|
| - Many other rates in existing contracts are tied to the fed
| funds rate so things like existing mortgage and student loan
| payments may get smaller as a result of this action
|
| - This will only work for new contracts insofar as credit
| risk does not materially increase (which it will in an
| economic downturn); banks will increase consumer spreads
| against the fed funds rate on a go-forward basis
| spodek wrote:
| In the context of Covid, wouldn't lowering economic activity help
| keep people home?
|
| It seems more than "just" saving lives. Purely economically,
| wouldn't a crashed health care system hurt the economy for a
| longer term?
| superkuh wrote:
| Not only that but they've removed the reserve requirements
| entirely for "thousands" of banks. There are only ~4500
| commercial banks in the USA total. So that's at least a good
| fraction of them. These banks can now create money out of nothing
| as much as they want.
| mandelbrotwurst wrote:
| Do you have a source for this?
|
| That doesn't appear to be the case at least according to the
| Fed's website
| (https://www.federalreserve.gov/monetarypolicy/reservereq.htm
| ), which shows the most recent change to the requirements being
| in January - setting it at 3% for large banks.
| superkuh wrote:
| Sorry. I should have included that.
| https://www.cnbc.com/2020/03/15/federal-reserve-cuts-
| rates-t...
|
| Start of paragraph 4.
| mandelbrotwurst wrote:
| Thanks.
| vpribish wrote:
| https://www.federalreserve.gov/newsevents/pressreleases/mone.
| ..
|
| last item, heading is "Reserve Requirements"
|
| "... the Board has reduced reserve requirement ratios to zero
| percent effective on March 26"
| jganetsk wrote:
| Reserve requirements never really limited the ability of banks
| to create money. Canada hasn't had reserve requirements for >20
| years. Neither does the UK, New Zealand, Australia, Sweden and
| Hong Kong. But all banks are indeed subject to capital
| requirements, and that does limit money creation
|
| Anyway, reserve requirements are generally not effective,
| including in the USA. Much has been written about this. Banks
| are usually not reserve constrained (especially post QE), there
| are many ways to game reserve requirements, there are many ways
| to get reserves when you need them, and central banks increase
| reserves systematically when they are in demand via interest
| rate mechanisms.
|
| [1]
| https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
| [2] https://en.wikipedia.org/wiki/Basel_III [3]
| http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_...
| [4] http://bilbo.economicoutlook.net/blog/?p=9075 [5]
| http://macromusings.libsyn.com/marc-lavoie-on-canadian-centr...
| [deleted]
| daddypro wrote:
| Does this interest rate transfer to lower mortgage rates? Is now
| a good time to refinance loans?
| inferiorhuman wrote:
| It's already a pretty good time to refi for most people as
| rates dropped to a bit under 3% recently. They went back up a
| little bit though as mortgage companies had to take on staff to
| handle all the additional demand.
| onlyrealcuzzo wrote:
| No. This is a rate for banks only. You get the rate banks pass
| on to consumers, which is obviously higher, because they need
| to make money.
| WalterBright wrote:
| Mortgage interest rates are usually "prime + x". So the prime
| reducing will reduce "prime + x" by the same amount.
|
| For the same reason, I expect margin interest to drop by the
| same amount.
| adeelk93 wrote:
| It will, but not just yet. There's too many people trying to
| refi right now and supply can't keep up with demand, so rates
| are higher than they should be. Give it another 3-6 months and
| I wouldn't be surprised if mortgage rates fell by another 1%.
| SomewhatLikely wrote:
| There must be some floor based on default rates right? If 2%
| of people default you can't go below 2%. And of course
| default rates go up in recessions.
| JoshuaDavid wrote:
| If 2% of people default _per year_ you can 't go below 2%.
___________________________________________________________________
(page generated 2020-03-15 23:00 UTC)