At what point does the Fed raise rates?

Martinghoul · Oct 14, 2009

Quote from number22:

yeah, two days ago, GEZ9 almost breached 99.6, then it bounced back. Scare stuff.

You are aware, I hope, that there's arnd 20bps of difference between front Eurodollar and front FedFunds?

As to the original subject, I have two questions. Firstly, determination of asset bubbles is subjective, whereas unemployment numbers aren't. Secondly, what if low rates are not only the reason for record bank earnings (which they are), but also the one thing keeping unemployment at 10% rather than 15%? Would you argue for higher rates, still?

number22 · Oct 14, 2009

Quote from Martinghoul:

You are aware, I hope, that there's arnd 20bps of difference between front Eurodollar and front FedFunds?

I was worried about Fed may raise its rate in Dec after seeing eurodollar drop down in last week. you are right, the front end eurodollar and fed funds only 16-18bps apart. Well, eurodoolar rebounded and usd crashed further and breached 1.49 today.

hofficita · Oct 15, 2009

Quote from zdreg:

the fed doesn't control long term rates. the market does. it only controls only the short term rates

This is a commonly repeated fallacy, it is patently untrue even in the absence of QE.

The Fed controls the value of money. Therefore it controls, to some extent, the price (in dollars) of all assets, including long bonds. A simple example would be if the Fed raised the price of money to 10%. Do you really think that the price of T bonds would not collapse to reflect the increase in the value of the money? In other words, who would lend for 30 years at 4% when they can get 10% on their cash? Long rates would rise, hence the fed has control of them.

nazzdack · Oct 15, 2009

Quote from hofficita:
.....if the Fed raised the price of money to 10%.

The Fed has a "bullish bias". Since government securities are their primary collateral, they have a (in)vested interest in maintaining their value. The next tightening cycle, if such a thing occurs in the future, may not go very far.

hofficita · Oct 15, 2009

Quote from nazzdack:

The Fed has a "bullish bias". Since government securities are their primary collateral, they have a (in)vested interest in maintaining their value. The next tightening cycle, if such a thing occurs in the future, may not go very far.

Of course they won't raise rates to 10%. There is no one at the fed, or in government, with the brains or balls to do what is right.

My point was that the fed does indeed control (to an extent) long rates, and when Bernanke/Greenspan say they had no influence on the housing bubble they are either dumb or lying. If cash was yielding 10% there would have been no mortgages at 5%, no teaser rates at 2%, much more savings and much less speculation.