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Currently, what economic benefit is gained by lowering the fed funds rate?
Posted on 4/21/25 at 11:07 pm
Posted on 4/21/25 at 11:07 pm
Over the past 50 years the average fed funds rate is around 4.6%, currently the fed funds rate is around 4.3%. Not sure where Trump wants interest rates but let's say Powell drops the fund rate down to 4% or lower, what economic benefit could we expect?
If the fed funds rate is dropped below 4% some money that is currently sitting in interest bearing accounts will likely begin the shift into equities, if we see a significant drop in the funds rate to below 3% a lot of money will flow back into equities, boosting the stock market.
If a fiscally responsible company is considering increasing their capital expenditures because they see opportunities for increased productivity and profits through business expansion, cutting interest rates from 4.25% down to 4% or 3.75% isn't really going to make or break their decision to expand. I think what's happened over the past 18 years with ZIRP and near ZIRP rates are reckless financial decisions by companies who can't resist taking that cheap money and by doing so they risk becoming over leveraged.
The Wall Street gurus always say the markets hate uncertainty, maybe the fed funds rate should stay in the 4-5% range to remove the uncertainty of the cost to borrow money and until the DC Uniparty can show they are fiscally responsible with US taxpayer dollars.
I think low interest rates/cheap money has been a huge factor in creating the current debt spiral that threatens the US with a looming sovereign debt crisis.
If the fed funds rate is dropped below 4% some money that is currently sitting in interest bearing accounts will likely begin the shift into equities, if we see a significant drop in the funds rate to below 3% a lot of money will flow back into equities, boosting the stock market.
If a fiscally responsible company is considering increasing their capital expenditures because they see opportunities for increased productivity and profits through business expansion, cutting interest rates from 4.25% down to 4% or 3.75% isn't really going to make or break their decision to expand. I think what's happened over the past 18 years with ZIRP and near ZIRP rates are reckless financial decisions by companies who can't resist taking that cheap money and by doing so they risk becoming over leveraged.
The Wall Street gurus always say the markets hate uncertainty, maybe the fed funds rate should stay in the 4-5% range to remove the uncertainty of the cost to borrow money and until the DC Uniparty can show they are fiscally responsible with US taxpayer dollars.
I think low interest rates/cheap money has been a huge factor in creating the current debt spiral that threatens the US with a looming sovereign debt crisis.
This post was edited on 4/21/25 at 11:10 pm
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Posted on 4/21/25 at 11:16 pm to Bass Tiger
quote:
Currently, what economic benefit is gained by lowering the fed funds rate?
A lower discount rate (banks charge from the fed) equals lower rates to borrow from the bank.
This increases the amount of loans given by banks to people.
The money the people use then stimulates the economy.
Posted on 4/21/25 at 11:22 pm to Bass Tiger
quote:
I think low interest rates/cheap money has been a huge factor in creating the current debt spiral that threatens the US with a looming sovereign debt crisis.
While that's partially true, the real deflation our wealth has been an open bank account for the FED/NGO's and our inability to control the vast production wealth sold under our feet by greedy politicians benefitting on offshore investments. Bring wealth generation back to the states through manufacturing, and the earnings is mostly restored to the country. The interest rate argument is a muse.
Posted on 4/21/25 at 11:43 pm to Bass Tiger
No one understands this bullshite. We are basically paying private banks to get our own money. The entire federal reserve was invented by the Rubens and the secret seven families to create wealth out of thin air
Posted on 4/21/25 at 11:59 pm to Bass Tiger
I think the fed plan is alright and makes sense. We will see if they cut next time or if they potentially have to raise it. Weve been at historic lows, and should things go bad and this trade war go poorly for us having some powder in the bag outside of QE is a good thing fiscally for us.
Posted on 4/22/25 at 12:01 am to Bass Tiger
I want it lowered enough for Trump to refi some of the federal debt and to allow the real estate markets to avoid the wall they’re facing where a massive amount of loans are coming due and without lower rates could trigger a crash particularly in the commercial sector.
We have bubbles all around us, while lower rates don’t fix all the fundamental issues we face, it would sure give us an easier path to a sustainable place economically at least in the short to mid term.
We have bubbles all around us, while lower rates don’t fix all the fundamental issues we face, it would sure give us an easier path to a sustainable place economically at least in the short to mid term.
Posted on 4/22/25 at 4:53 am to Bass Tiger
Lower rates could offset some of the increase in car prices due to the tariffs. Companies that need to borrow to build new manufacturing plants in the US would also benefit.
Even though interest expenses is considered "below the line" debt servicing is probably baked into the cost of most products you buy.
Even though interest expenses is considered "below the line" debt servicing is probably baked into the cost of most products you buy.
Posted on 4/22/25 at 5:40 am to Bass Tiger
quote:
I think low interest rates/cheap money has been a huge factor in creating the current debt spiral that threatens the US with a looming sovereign debt crisis.
Somewhat. While consumer debt has been running wild since COVID, it's been nothing compared to federal debt. Aside from 3 years, the annual public debt growth has outpaced the growth of GDP ever since the GFC (2008). Since COVID (FY2020), the average annual debt growth has been ~89% greater than the average annual increase in GDP. That's not the Fed printing money (at least not the majority of it), that's Congress creating more and more debt.
Posted on 4/22/25 at 5:43 am to Bass Tiger
quote:
If a fiscally responsible company is considering increasing their capital expenditures because they see opportunities for increased productivity and profits through business expansion, cutting interest rates from 4.25% down to 4% or 3.75% isn't really going to make or break their decision to expand.
You could not be more wrong on this. Real Estate is not my business, but my best friend from HS has been in it for about 35 years, and he sweats every 0.25% of interest rate.
The Fed wants to use interest rates to stimulate or dampen the economies natural slowdowns or excesses. They only have so much to give or take, and they don’t want to use it to make of for what they believe might be ephemeral policies. Anyway, the judgment on when to stimulate, as we’re heading into a slowdown, is a tough call, as much art as science. A President will usually be calling for more and faster, whereas a Fed Chair will usually be a bit more cautious and not want to use up his powder and not have it when we really need it.
Posted on 4/22/25 at 6:08 am to Bass Tiger
quote:FFR is tied to inflation rates (Fed inflation target is 2%). An economic equation aka the Taylor Rule bases the tie. So a neutral FFR at target would run 2.5%. Current inflation is 2.4% and falling. FFR is ~4.4% and holding. FFRs higher than neutral are restrictive. An Inflation-FFR gap greater than 2% is considered not just restrictive, but highly restrictive. What is the justification of restrictive - highly restrictive Fed policy in this environment?
Over the past 50 years the average fed funds rate is around 4.6%, currently the fed funds rate is around 4.3%. Not sure where Trump wants interest rates but let's say Powell drops the fund rate down to 4% or lower, what economic benefit could we expect?
The explanation we're being hammered with is Tariffs!! Tariffs!! Tariffs!! Continual media "expert" screeching holds tariffs as terrible inflation-riddled vehicles. That is the excuse Powell and the Fed cite for the otherwise completely inexplicable highly restrictive policies it is maintaining.
Here is the problem with the Fed's stance:
Inflation is a measure, not of price, but of price change.
Tariffs are a one-off cost bump.
Subsequent to the tariff cost bump (i.e, increased price of goods), economic effects would lead to expectedly decreased demand, therefore deflationary, not inflationary, pressure. That is a critical nuance.
Fed funds policy is designed to counter directional market pressures, not one-off tariff bumps. Typically, with inflation, the FOMC is targeting effects of increased money supply through increased FFRs and QT. But if the sole cause of price increase is a one-time tariff price shock, the only way to reverse it would be a reduction of the tariffs themselves, something the FOMC is neither equipped nor empowered to do.
In fact, rather than reducing tariff costs, deployment of FFR/QT to "counter" tariff price increases would be expected to simply pile on correspondent deflationary pressures following the tariff cost-bump. Obviously, such an action reeks of a recessionary catalyst.
Posted on 4/22/25 at 6:41 am to Bass Tiger
Money becomes so cheap that it encourages debt and discourages cash savings (CDs, money markets, etc.).
The rate should be allowed to go back to its historic norms. Throw out the last 20 years and check the average rates again (beyond just the Fed Funds rate). We’ve had extremely cheap money for way too long.
The rate should be allowed to go back to its historic norms. Throw out the last 20 years and check the average rates again (beyond just the Fed Funds rate). We’ve had extremely cheap money for way too long.
Posted on 4/22/25 at 6:42 am to Bass Tiger
Probably the biggest benefit is one that nobody talks about and that's the fact that a lot of the government debt is getting ready to roll over. Beyond that it's been my view that the funds rate has always been too high when you refer to the average over the last 50 years. It's really nothing more than gatekeeping
Posted on 4/22/25 at 6:48 am to Bass Tiger
The cost of everything today vs 5-6 years ago is what matters. It’s the same conversation I have with older folks who tell me their mortgage interest rate was even higher than 7%. Yes that’s true, but the price of a home, car, food etc etc were much more affordable in comparison to wages.
Posted on 4/22/25 at 7:03 am to Bass Tiger
Money is too expensive. We got addicted to cheap money. I believe with inflation in check, if Trump can offset tariffs with cheap energy, there is a happy place for rates between where we are and where we were.
This post was edited on 4/22/25 at 7:04 am
Posted on 4/22/25 at 7:07 am to Bass Tiger
quote:
Currently, what economic benefit is gained by lowering the fed funds rate?
It's not a economic benefit, but maybe then SDVTiger would finally shut his pie hole.
Posted on 4/22/25 at 7:09 am to beerJeep
quote:
A lower discount rate (banks charge from the fed) equals lower rates to borrow from the bank. This increases the amount of loans given by banks to people. The money the people use then stimulates the economy.
I think the OP is asking if that’s actually a net long term benefit. Do we really want people/government borrowing even more?
Posted on 4/22/25 at 7:16 am to NC_Tigah
quote:
What is the justification of restrictive - highly restrictive Fed policy in this environment? The explanation we're being hammered with is Tariffs!! Tariffs!! Tariffs!! Continual media "expert" screeching holds tariffs as terrible inflation-riddled vehicles. That is the excuse Powell and the Fed cite for the otherwise completely inexplicable highly restrictive policies it is maintaining.
It’s not just tariffs though. It’s tariffs, immigration policy, and fiscal policy (tax cuts). All 3 are varying levels of inflationary.
The Fed has a dual mandate, not simply price stability. Their employment mandate is moving along just fine, so staying restrictive is understandable given the prolonged stickiness of inflation. They also consider inflation expectations in their calculations, and those have risen considerably.
Posted on 4/22/25 at 7:29 am to TerryDawg03
quote:FFR is driven by inflation and unemployment rates, and has been since Humphrey-Hawkins in the Carter Administration. So historic norms were based on that dual mandate. Historic norms would put us at an FFR of 3%, given the current environment. We're at 150% of that.
The rate should be allowed to go back to its historic norms.
Posted on 4/22/25 at 7:42 am to Bass Tiger
quote:
Currently, what economic benefit is gained by lowering the fed funds rate?
Hmmm?
Lower interest payments on the national debt.
Reduce inflation.
Lower car notes.
Lower mortgage payments.
Cheaper home improvement loans.
Lower cost of small business investments like tractors, delivery vehicles, computers, fixtures, and other equipment.
Higher employment through business expansion.
Better paying jobs.
More affordable major appliances.
Lower payments on student loans.
Better vacations.
Increase personal savings and investments.
Can afford the family pet.
Can afford more child extracurriculars.
Can move mom into a better old age home.
Etc., etc., etc.
GEE, I guess you’re right. I can’t see any advantage in lowering the rates either.
Posted on 4/22/25 at 7:52 am to NC_Tigah
I also mentioned other rates that they can affect. Their official tools are limited, but they influence so much more after starting QE and other direct involvement. Mortgage rates never dropped below 5% prior to 2009, yet people think mortgage rates over 5% are high. Sure, this is an effect of the yield curve’s movement after Fed Funds rate changes, but they also started messing in markets they had no business being in. The Fed never should have been purchasing MBS or commercial paper to begin with.
I go back to the point that they need to let things correct and stop kicking the can on cheap money.
I go back to the point that they need to let things correct and stop kicking the can on cheap money.
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