It seems that the Federal Reserve has overstepped their mandate and is starting to make up excuses as to why they will keep interest rates at historical lows. First of all what is the Feds mandate:
"The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act." (source Federal Reserve)
The Fed recently has overstepped it's mandate by looking outside the United States, they are now concerned with global growth in particular a slowing economy in China and worries about the Brexit. This has prompted the 10 year treasury to hit close to a year low of 1.54% and this may further delay an increase in interest rates in 2016. This is an overstep of the Federal Reserve mandate because they are looking at the global growth picture as an excuse not to raise rates.
The concern is there is no end in sight for low interest rates, while this is good for borrowers it is devastating for those who are savers. The result of low interest rates have been great for the stock market for the last few years however this cannot continue indefinitely. There will come a time when rates will have to come up and unfortunately may cause a great deal financial instability as rates reverse course. The continued low interest rates have become a burden and do not encourage governments and households to reduce their debt, the end result is a huge credit bubble that could have long lasting effects on the U.S. economy.
Well the unemployment rate as of August 2016 is 4.9% and there is very little inflation to speak of at least according to the government figures. The Fed back in April of 2014 removed the language of a 6.5% target by saying it was outdated. "The members of the Federal Open Market Committee agreed unanimously in March that a 6.5 percent unemployment target for raising interest rates was outdated and should be removed, according to meeting minutes." (source CNBC article) This of course takes us to present day with interest rates at historic lows and the Fed funds rate at 25 basis points. The situation is unfortunate and I understand it from the Fed's perspective that it is very difficult to raise rates because of the huge financial implications however saying this I think it is better to act now while the situation is in the Fed's control. It will be far worse when rates go up and it is beyond the Fed's ability to control and engineer rates.
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This private bank has been enslaving Americans for too long, I hope steemit is the the answer
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The Fed is very much trapped. Flooring interest rates and holding them there as long as they have is a desperate move by the Fed. It knows what happens to banks, insurance companies, pensions, and anyone who relies on fixed income when interest rates are kept low for a long period of time.
Most people assume that lowering interest rates is good for financial companies, but that is a misunderstanding. Or rather, it is a matter of time scale. In the shortest of terms, lowering interest rates is great for financial companies: it immediately and directly raises the price of many financial instruments, such as bonds, which become comparatively more attractive than new issues at the lower interest rate. When the primary issue was solvency of overlevered banks, low interest rates were very welcome, and kind of saved the day for the banks by raising the price and putting a persistent bid underneath their most precarious assets.
But even if they were a godsend to banks in 2009, when they were teetering on the brink of insolvency, low interest rates are not good for financial companies in the long term and even the medium term. Their portfolio may have gotten a much needed jolt upward, but it's a one-time thing, and after that, the longer the interest rates are floored, the more it happens that their higher interest rate portfolio items age off and are replaced by loans and bonds at rock bottom interest rates that don't pay them enough to be worth the considerable risk. In a chronically low interest rate environment, banks get weaker and weaker, pensions have very hard time making the 7-9% they need to remain solvent, insurance companies have to go out further on the risk curve in order to pay claims. In short, everyone has a hard time making their nut.
Basically, in 2007, the financial economy was put on life support. the Fed cannot admit that much of the financial world will collapse immediately as soon as interest rates materially rise, but that is in fact what will happen. Once the interest rates rise, asset values (which depend on easy money financing) will fall pretty much across the board. Funding will again be stressed for financial companies. Homes will again plummet in value, bringing banks along for the ride. And so on. It will be 2008 all over again.
That this will happen eventually anyway is beside the point. Given the choice between ushering in an immediate financial collapse as a direct result of its actions, or delaying it as long as it possibly can, the Fed has chosen the natural move: delay. A collapse later is preferable to a collapse now. Especially since, who knows how long it can keep later from being now. I don't know about you, but i'm a little surprised how long it has been able to so far. I would have given pretty long odds in 2008 against the Fed's ability to keep an extremely overpriced and overleveraged market from collapsing. But i was wrong. I still think it will fail eventually, but who knows when that will be?
In the meantime, they will continue to sound oh so serious about a material raise of interest rates. They might even manage to raise rates a trivial amount. But in general, they will always have good reasons not to raise materially. Their best path is in always looking like they might in the near future.
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Nice @bythenumbers432
Shot you an Upvote :)
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