MetaFilter posts tagged with interestrates

Money for nothing: a new era of zero interest rates?

Mutant — Wed, 12 Nov 2008 03:27:18 -0800

The Fed cut 100 bps. BOE cut 150 bps. ECB cut 50 bps. India, Vietnam, The Czech Republic, Switzerland, Denmark, South Korea and other nations have all cut interest rates in recent weeks, with many Central Banks cutting more than once. The G20 is now discussing the possibility of further, coordinated interest rate cuts. As interest rates globally plummet, we are observing what some analysts are calling "The Race to Zero". Today almost every nation in both the developed and developing worlds is deeply in the territory of negative real interest rates. In other words, savings kept dormant in the bank loses, rather than gains, value. As the long anticipated great unwinding continues Central Bankers seem to be hoping that low interest rates will force consumption, pushing economies forward at the same time monetary policy pulls. Given this backdrop, a natural question would be how low can interest rates go? The answer may lie in an unpublished Federal Reserve research paper, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero.” (Clouse, J., et al, 2000) [.pdf] Bonus street cred: Two of the authors are architects of some of the unconventional mechanisms currently deployed by The Fed to fight this crisis (Clouse, J., Small, D., 2004) [.pdf]. No time for lengthy pdfs, no problem! The New York Fed published a single page, very accessible summary [.pdf] of unconventional tools currently in use. Full citation of research papers cited: Clouse, J., Henderson, D., Orphanides, A., Small, D., Tinsley, P., 2000, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero”, unpublished, Federal Reserve Board, Finance and Economics Discussion Series, 2000-51 FEDS Papers, Board of Governors of the Federal Reserve System Clouse, J., Small, D., 2004, "The Scope of Monetary Policy Actions Authorised Under The Federal Reserve Act", Federal Reserve Board, Finance and Economics Discussion Series, 2004 FEDS Papers, Board of Governors of the Federal Reserve System

Is Ben Bernanke a finally coming out of the closet?

Mutant — Mon, 09 Jun 2008 04:01:36 -0800

While the wild crowd call it "Woodstock for Central Bankers", others get festivities off on a sour note, referring to it as "Understanding Inflation and the Implications for Monetary Policy". Regardless of what your invitation to this party reads, it starts today, Monday June 9th on the 50th anniversary of The Phillips Curve, a previously discredited forecasting tool which may be revived by Ben Bernanke at The Federal Reserve. The Phillips Curve models an inverse relationship between unemployment and the rate of inflation. Specifically, as inflation increases unemployment decreases, and vice versa. Adherents of The Philips Curve argue for a monetary policy accepting relatively high rates of inflation as a trade off for low unemployment. While we have seen The Phillips Curve hold during long periods of both American and British economic history we have also seen 1970's style stagflation invalidate this theory, and today many believe the purest form of this model to be flawed. However variants of The Phillips Curve exist and are still in use by a variety of market participants to help forecast interest rates. It was long suspected Alan Greenspan used what is known as "The Fed Model" - a comparison of the ratio of stock's earnings to prices¹ against the yield on a 10 year Treasury bond - to help guide decisions regarding monetary policy. Knowing precisely what models are used by The Fed is highly valued information to those hoping to anticipate - and thus profit from - changes in interest rates. Until now, Fed watchers could only speculate about the tools Ben Bernanke would deploy as part of his decision making process. But with his keynote address at this conference, and considering other times he's mentioned this model, it's now obvious - Ben Bernanke is a closet Phillips Curver. No doubt a large number of market participants are busily building their own Phillips Curve models. ¹That is, a ratio calculated as earning divided by price, not to be confused with the more commonly known price to earnings ratio, or PE.

Cui bono?

Pastabagel — Thu, 20 Sep 2007 09:41:30 -0800

On Tuesday, the Federal Reserve cut interest rates by 0.5%. Wall Street aggressively demanded the cut to stop the sub-prime mortgage contagion from triggering a credit crisis among large US and foreign investment banks and the collapse of their over-leveraged hedge funds, which ultimately threatened to drag the US economy into recession. The market rallied this week in response to the Fed's move. But there is no free lunch. Oil rallied also, to an all-time high of $81/bbl. The rate cut shattered the dollar, sending it to new lows against the Euro and to parity with the Canadian dollar. The falling dollar puts pressure on China, whose dollar-pegged currency has attracted the ire of many US politicians, causing China to threaten the US with the "nuclear option" of diversifying its foreign currency reserves away from the dollar. Meanwhile, Saudi Arabia refuses to cut its interest rates in lockstep with the US for the first time ever, signaling that it may break its long standing dollar peg as well. In other words, foreign investors who currently own roughly 50% of the publicly-owned portion of the US national debt may flee the US bond markets. Result? We'll probably slide into recession anyway. But there is a silver lining: it turns out that many of those large investment banks and hedge funds were making far more money than anyone thought all along. Confused? Some background: Currency carry trade - how currencies are related to one another How interest rates, inflation, exchange rates, and trade deficits are interrelated How interest rates and bonds are related Peviously 1 2 3 4

aaron — Wed, 18 Apr 2001 09:37:17 -0800

The Fed surprises everyone with a 50-basis-point interest rate cut. (That's half a percent in lay terms.) The annoucement came out of nowhere, and the markets have gone nuts on the news: Dow up 4%, Nasdaq up 9%. But is this good news overall? I don't think it is; I think it means Alan Greenspan has data on the state of the economy that shows it's worse than everyone believes.