The Fed is Killing the Economy!!

If only looking from a far, it makes sense why the Fed would want to increase interest rates. However, when you dive a little deeper, it doesn't really seem to add up.

The fed has raised interest rates now THREE times in 2018.... when inflation is not out of control, prices are not rising too fast, and maximum employment has not yet been reached.... Does it make sense that they are planning on raising rates even more? Is the Fed not running the risk of destroying this historic bull run?

In reality...... What is raising the rates doing?
- Punishing borrowers and rewarding banks (effectively passing money from consumers hands to banks pockets)
- Inhibiting future borrowing which will effectively slow economic growth
- In the hopes of SLIGHTLY combating rising prices/inflation....

Who does this hurt?
- The average family with a mortgage
- The average post-grad with a student loan
- The average consumer who wishes to spend
- AKA 95% of the population

Who does this benefit?
- Banks who are earning more on the money they have already lent out
- Wealthy investors looking to invest in new bond issuances (new bonds will offer high cpn rates)
- AKA Banks and

 

It only rewards banks with positive gap, of which there are few. Higher rates will flatten the yield curve and hurt bank investment. Higher interest rates are actually disproportionately bad for the wealthy. It increases their hurdle rate on investments.

Basically higher rates will trigger an economic panic. If the FED continues at this rate, there will be a significant recession in the near term. The funny thing is, if Trump left Yellen at the FED, he likely wouldn't have to deal with this.

“Elections are a futures market for stolen property”
 
Most Helpful

With enough forward guidance rates should not trigger economic panic. Honestly, the FED can never win. You and OP are correct in that the FED isn't raising rates to combat inflation since inflation is actually quite manageable right now. I believe the FED is raising rates because they anticipate a recession and are worried they won't have the "bullets" necessary to combat a recession. Pre 2008 FFR was a little over 5% and had to be decreased to zero bound to get the economy back on track. IF they anticipate another recession as bad as that in the coming years then logically their target should be 5.5% in the next 2/3 yrs.

(EDIT: I want to add that I don't think the FED's mentality is "there might be a recession soon, lets get to 5.5%". I just think the concern of a pending recession might play into their desire to begin raising rates. Obviously there are others factors that they undoubtedly consider such as unemployment / inflation / etc.)

Here's the catch though... Obviously nobody can predict if / when / how severe the next recession will be. Either the FED doesn't raise rates, a recession occurs, and they're in a position where they have minimal runway to decrease rates from the 2 to 3% they'll likely be at if they don't act and just wait for a recession to come.

On the other hand they continue to raise rates the way they have been and a recession hits. It would be difficult to discern if a recession was a product of rates rising, general economic strain, or both. They'll be immediately targeted as the "bad guys" that "not only caused the historic bull market to come to an end but ALSO cause a recession.

Honestly, I'd much rather slow growth than risk being ill-prepared for the next crisis, regardless of if it is as more / less severe than 2008.

 
FinancelsWacc:
With enough forward guidance rates should not trigger economic panic. Honestly, the FED can never win. You and OP are correct in that the FED isn't raising rates to combat inflation since inflation is actually quite manageable right now. I believe the FED is raising rates because they anticipate a recession and are worried they won't have the "bullets" necessary to combat a recession. Pre 2008 FFR was a little over 5% and had to be decreased to zero bound to get the economy back on track. IF they anticipate another recession as bad as that in the coming years then logically their target should be 5.5% in the next 2/3 yrs.

(EDIT: I want to add that I don't think the FED's mentality is "there might be a recession soon, lets get to 5.5%". I just think the concern of a pending recession might play into their desire to begin raising rates. Obviously there are others factors that they undoubtedly consider such as unemployment / inflation / etc.)

Here's the catch though... Obviously nobody can predict if / when / how severe the next recession will be. Either the FED doesn't raise rates, a recession occurs, and they're in a position where they have minimal runway to decrease rates from the 2 to 3% they'll likely be at if they don't act and just wait for a recession to come.

On the other hand they continue to raise rates the way they have been and a recession hits. It would be difficult to discern if a recession was a product of rates rising, general economic strain, or both. They'll be immediately targeted as the "bad guys" that "not only caused the historic bull market to come to an end but ALSO cause a recession.

Honestly, I'd much rather slow growth than risk being ill-prepared for the next crisis, regardless of if it is as more / less severe than 2008.

It is raising rates to fight inflation. Its concern now is overshoot. The bigger question is whether lower rates is the new normal or should it be a 5.5% range.

 

Wrong....monetary policy acts on a 12 to 24 month lag. Even if current inflation is fine, you may still want to raise rates if you believe current conditions could lead to inflationary pressures one to two years from now.

 

@Esuric Pretty positive most banks have a positive gap, however, regardless of whether most do or don't, what you are stating does not hold true. Banks do benefit from increased rates. Even if banks were to possess a negative gap, the vast majority of liabilities are on their balance sheets are held at a fixed rate while the Assets they possess are primarily floating. Therefore, they may be less affected by the rates, however, they are most definitely benefiting from increased rate hikes.

There is more than one way to get there. I'd rather have 30 chapters than 3000 pages.
 

Are deposits not the biggest liability on bank balance sheets? Do the yields on deposits not rise when the FED engages in contractionary monetary policy?

“Elections are a futures market for stolen property”
 

It's been a while since I've taken a FIG course and so I'll concede the point on bank gap. That said, the FED only controls the short end. Higher short term rates means greater liabilities (deposits) and a flatter yield curve. Flat yield curves are not good for banks.

In the end, we're going to have to wait and see.

“Elections are a futures market for stolen property”
 

NIM spread has widened for banks, but depositor rates are catching up. It was great while it lasted, but banks have had to increase rates to catch up.

I'm more focused on the FED unwinding their balance sheet. I do think rates should be increased, but it is definitely having an impact on the market right now.

Then again, mayhem is breaking out everywhere.

 

@Esuric __"Are deposits not the biggest liability on bank balance sheets? Do the yields on deposits not rise when the FED engages in contractionary monetary policy?"

When have you ever seen a savings account, investment account, or deposit interest rate EVER offer a floating rate return?

When have you ever seen a revolver EVER be priced as fixed?

There are exceptions to both, however, the vast majority of Assets are floating and vast majority of Liabilities are fixed.

There is more than one way to get there. I'd rather have 30 chapters than 3000 pages.
 

Deposit rates float with the inter-bank overnight market rate (i.e., FED fund rate). Mortgages, car loans, etc., often fixed..

“Elections are a futures market for stolen property”
 

Yes but no bank holds mortgages, car loans, etc. They all take advantage of the programs GNMA/FNMA, and the SBA program have set up. So essentially what most banks do with general fixed rate loans is sell them off to lenders, who in turn then securitize them. Most fixed rate assets on a typical banks balance sheet will consist of CRE/C&I, business loans, leveraged loans, public finance loans, etc. (basically riskier products). And they will hedge a lot of that risk away. The rest of their assets are floating rate, so they will try to keep a SLIGHTLY positive duration gap. And CD/MMKT/Core deposit rates (Most banks sole source of cash) are far outweighed by rates on most balance sheet assets, so NIM actually widens as consumers have incentive to save. Just my two cents - used to intern in a fixed income role at mid sized bank, and this the most common strat I saw.

 

The Fed's job isn't to maintain bull markets in asset prices, it's to regulate both economic growth and sustainability. Waiting for inflation to shoot up drastically will result in the Fed being reactionary and would throw the markets into even more volatility. The FFR has been so low for so long that it simply needs to go back to normal. If we were at some .75% - 1.25% FFR when the next downturn occurred, monetary policy would have only so much ammunition to spur growth.

However, I am also in the boat that the economy is not as 'sunshine & roses' as most people suggest. Unemployment may be at some absurdly low number but labor force participation, the denominator for that figure of unemployment, is the lowest it's been since the 70s. Moreover, there's never been more job openings in this country but there is such a gap between the skills demanded (STEM, programming, ideas, etc.) and labor supplied which a lot of is precisely unskilled. Small town America is dying and you can't just run the corner store anymore to get by with automation and the migration to urban areas. And I think an even bigger problem that people are talking about but nearly not enough is student debt. I know too many people who hold student loans and it's stopping them from getting even an apartment. A lot of people in this generation have gone to school simply because they think they're supposed to unlike previous generations. After all, we don't have enough mechanics, plumbers, or electricians right now, and that $50,000 in debt probably won't be paid off soon by the income you get off of your comms degree. I don't think this ends in a hard landing, but I bet you see, long-term, an overall stagnation in consumption and home ownership from millennials.

Not too high, not too low
 

This whole experiment is doomed to fail. S&P 500 revenue growth is weak - earnings growth has mostly come from offshoring, cheap immigration labor, and technological automation. All of these things kill lower to middle class real wages and reduce the workforce participation rate. This decreases consumption and the downward spiral continues. All of the consumption growth in this country has come from artificially low interest automobile/house interest rates and irresponsible credit card growth.

There will be a terrible end to this madness at some point.

 

Has no one actually considered that this is planned..... The FED has been a tool of political partisanship for over 40 years now. Does it really suprise anyone that they would be doing this given what many of the FED board members have said about the current government?

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 
heister:
Has no one actually considered that this is planned..... The FED has been a tool of political partisanship for over 40 years now. Does it really suprise anyone that they would be doing this given what many of the FED board members have said about the current government?

If you think about this for 10 seconds, you'd realize how dumb this sounds. I think people hear Trump's tweets and forget he painted his walls gold and said he was rich, so everyone believed him.

 

Well, I don't really have a comment on the politics of the current Federal Reserve, but you do have to consider politics also within the decision-making process of the Fed. It's a topic which has gotten a lot of academic research over the past few decades. For example, see below this 792 page tome on the subject below.

https://press.princeton.edu/titles/6819.html

So at face value, this might seem like a stupid comment, but there is quite a bit of debate on this topic. Not sure if heister meant what I'm talking about but regardless quite a lot of literature on the subject of political economy and central banking.

 

Hate to be a dick but just about every answer above would be an F in almost any econ class.

With monetary policy, you have to remember that there is a significant lag of about 12 to 24 months. As a result, the Fed essentially has to raise rates before inflation shows up. So, you're basically reacting to what you believe the data might be in a year or two rather than what the data says now.

If you wait for inflation to show it's ugly head, then you get into a Volcker type situation where you have to pull up interest rates into the double digits to push inflation back down. Hence, the Fed would rather tap the breaks now rather than risk a situation like that again.

 

Yes, I did read your previous response. The purpose of interest rates is not to have more "bullets" for the next recession.

I'll give you a D- because from a position of high rates, you can lower them to create stimulus, but raising rates primarily so that you can have more bullets later is not what the Fed is trying to do.

The funny part is that you are correct. This isn't a freakin essay. It is the very basics of monetary policy. I don't even want to know what your essays would look like.

 

Pretty sure everyone is aware the chief desired effect of interest rate movements is movement in inflation and economic growth. People including myself made a point that we've needed to lift off for quite some time now to proactively move on anticipated movements in the case of a downturn.

Not too high, not too low
 

Yikes. All I do is ask if they're raising rates too quickly and people are grading each other's responses, throwing poo, and thinking their almighty. Geeeeeeeeez. Some people just look for every opportunity to act superior. NoEquityResearch

There is more than one way to get there. I'd rather have 30 chapters than 3000 pages.
 
Global_IU_11:
Trump is going to restructure the fed. The fed is currently his biggest threat but I don't think it will be for much longer. If you compare rate raises between the Trump and Obama presidencies it isn't even close and the reason is political.

lol Sean Hannity is that you?

If you look at the last 50 years, the Fed is always too late with rate hikes. This time is no exception. The comically bad policy decisions on trump's part aren't helping things but if they were done say, 5 years ago, maybe would be better off.

For now though, the economic cycle demands a recession, or at least a slowdown, and the longer it's pushed out the worse things will be...

Get busy living
 

With strong gdp, substantial wage pressure and inflation, while not high, higher than it had been, the Fed has a statistical basis for raising interest rates. Despite what some people say, the pace of rate increases has not been very fast. The Fed has increased the Fed Funds target about 2% in 3 years.

Interest rates had been unusually low for a long period of time. The stock and bond markets greatly benefited from the falling interest rate environment, which started in about 1981 but now it looks like the party might be coming to an end.

The Fed reacts to the environment. If you want to place some blame, you can look no further than the recent tariffs and tax cuts. Tariffs can lead to higher inflation and so can tax cuts during an expansion.

http://www.series7examtutor.com
 

I honestly don't mind the Fed increasing rates. Or unwinding the balance sheet. There is a reason they are doing it now and not during Obama's Faux-covery and it is because Trump lowered taxes, renegotiated antiquated trade agreements and is rolling back regulations. The real economy, not the market, it improving and we can therefore support and handle an increase in rates.

IMO, the market vol we are seeing is part rate increases, part trade war with China and part mid-term elections and the realization that if Dems take the house, they will do everything in their power to basically derail every pro business, pro economy policy Trump has put in place.

We need to break China's back and then things will be fine again. While the Dem's rail about Russia, the real enemy, China, is being ignored. They verifiably hack both the government and private sector. Steal both's IP. Build illegal islands and weaponize them. Have unfair trade practices and are actively engaged in undermining our power.

We should have put our boot on their throats decades ago, but liberal economic policy (not liberal as in social) told us that "free" trade was good. What it really did was gut the middle class in this country, build up a Communist country and temporarily increase profits for businesses that fucked over stake holders for share holders. Notice how you don't hear businesses pissing and moaning right now? It is because they've realized China isn't an open market and they've lost millions in IP from Chinese hacking and fucked up business practices.

Little pain in the short term will benefit us all in the long term.

 
TNA:
I honestly don't mind the Fed increasing rates. Or unwinding the balance sheet. There is a reason they are doing it now and not during Obama's Faux-covery and it is because Trump lowered taxes, renegotiated antiquated trade agreements and is rolling back regulations. The real economy, not the market, it improving and we can therefore support and handle an increase in rates.

IMO, the market vol we are seeing is part rate increases, part trade war with China and part mid-term elections and the realization that if Dems take the house, they will do everything in their power to basically derail every pro business, pro economy policy Trump has put in place.

We need to break China's back and then things will be fine again. While the Dem's rail about Russia, the real enemy, China, is being ignored. They verifiably hack both the government and private sector. Steal both's IP. Build illegal islands and weaponize them. Have unfair trade practices and are actively engaged in undermining our power.

We should have put our boot on their throats decades ago, but liberal economic policy (not liberal as in social) told us that "free" trade was good. What it really did was gut the middle class in this country, build up a Communist country and temporarily increase profits for businesses that fucked over stake holders for share holders. Notice how you don't hear businesses pissing and moaning right now? It is because they've realized China isn't an open market and they've lost millions in IP from Chinese hacking and fucked up business practices.

Little pain in the short term will benefit us all in the long term.

Lol are you paid by the Republican Party? You’re super committed to promoting the gop no matter how absurd the party line is. You’re like the living embodiment of the old saying “being more loyal than the king”

Get busy living
 

Last time I checked, the GOP was all about shipping jobs overseas to China and fucking manufacturing.

Sorry, but the tax cuts were much needed to make the US competitive. Deregulation, renegotiating NAFTA, and finally going after China were all long over due. And all things the pig Republicans didn’t have the sack to do.

So no, I’m not Republican cheerleader.

 

Ut ut minima autem quas ut praesentium. Molestiae nihil ab expedita. Impedit iusto minus quod ut. Quia aspernatur sequi et eos aut recusandae sed sed. Facere voluptatem voluptatibus nam sunt laudantium. Molestiae eligendi similique expedita vitae. Quia sit dolores explicabo eos ex. Recusandae vel repellendus placeat eos magni inventore.

Facilis quam similique voluptatem ut aliquam earum exercitationem. Rerum aut consequatur voluptatem aut ab. Eaque ducimus pariatur natus recusandae.

Nam odit voluptas accusantium voluptatem voluptas rerum dolore rerum. In et doloremque inventore placeat dolorum autem voluptate. Possimus est eligendi dolorum et et voluptatibus facilis. Reprehenderit at possimus cupiditate laudantium iure deleniti. Veritatis ex voluptates est. Veniam inventore laboriosam quas aut nesciunt.

Distinctio nulla perferendis ex consequatur ratione. Ut recusandae quas iure ducimus quod. Harum ex dolores libero quidem magnam. Qui eveniet tempore deleniti dolorem ipsum voluptatem veniam. Autem vel ut amet voluptatem aliquam.

Get busy living

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Betsy Massar's picture
Betsy Massar
99.0
5
kanon's picture
kanon
98.9
6
dosk17's picture
dosk17
98.9
7
GameTheory's picture
GameTheory
98.9
8
CompBanker's picture
CompBanker
98.9
9
DrApeman's picture
DrApeman
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”