Federal Reserve Raises Rates

Discussion in 'The Economy' started by Falcon, Dec 16, 2015.

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  1. Falcon

    Falcon Major Staff Member Social Media Team

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  2. Technofox

    Technofox That Norwegian girl Staff Member Ret. Military Developer

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    So much for all the doom-saying about the strength of the US economy:cool:. I'm guessing this .25% hike is to test the waters right? To see how the US economy, and especially its consumers react?

    The rate is projected to be raised to at least 1.375 by the end of 2016, according to Bloomberg:

    The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.

    [​IMG]

    2% is the end goal:

    “The committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective,” the FOMC said in a statement Wednesday following a two-day meeting in Washington.
     
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  3. Strategist

    Strategist Officer Candidate

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    I didn't receive an alert for this for some reason. In any case, it will be interesting to see how this plays out. There are several possible scenarios:

    1) The US economy really is recovering, and the dot-plot predicting steady rate rises will be vindicated. The prime driver of this bull case is the unemployment rate:

    [​IMG]

    2) The US economy isn't really recovering, and this rate increase will be the last for some time as the "green shoots" of recovery fail to materialize yet again. Bears point to indicators like the following:

    [​IMG]

    3) The rate increase actually drives inflation expectations higher, and in turn, economic activity (i.e. increased mortgage applications while rates are still low, more housing starts, increased business investment, etc.). That would be ironic, wouldn't it?

    4) Material weakness in the economy leads the Fed to reverse the rate increase, and emulate the ECB's negative interest rate experiments. The primary driver of this would probably be China's slowing growth and a failure of Europe's economic recovery.

    All of these are obvious potential outcomes, and no one really knows what will happen. I only point out these scenarios because this rate increase has been hyped to such a great extent, but it's actually a non-event in and of itself. What matters is the trend, not the individual action.
     
    Last edited: Dec 16, 2015
  4. Falcon

    Falcon Major Staff Member Social Media Team

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    I have two questions:

    Numero Uno: Has unemployment actually decreased? I have read online on government statistics sites that the number of people outside of the work force is at an all time high, if this is the case what is the significance of the "unemployment" number?

    2: Can we expect the currencies of the BRICS countries to lose more value?
     
  5. Strategist

    Strategist Officer Candidate

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    1) Good question. You are referring to the "labor force participation rate," or the percent of Americans of working age who are employed or looking for employment, is at 30-year lows:

    [​IMG]

    Not a good sign for the economy, to be sure, and it makes many people skeptical about the official unemployment rate (the one I used above). There is another unemployment rate called U6, which attempts to capture those who are forced to work part-time when they actually want full-time employment, and those who are discouraged from seeking a job and are not officially counted in the labor force, but would like to work if employment were available. At 9.9%, it's nearly double the official unemployment rate of 5.5%. Not so good. But that, too, is trending down, which is one reason why the Fed had has a bit more confidence in raising rates, despite the rather high rate (note also that U6 has reached levels similar to those before the financial crisis).

    [​IMG]

    In short, things are not as good as they appear officially, but they are not as bad as the bears claim. In addition, the situation is rapidly improving, no matter what metrics is used.

    2) Forex is a complicated market, as everything is relative. GDP growth rates, interest rates, inflation rates, trade surpluses/deficits, speculation, and politics all play a part in determining the exchange rate. What will drive a strengthening of the USD vs. BRICS exchange rates is the recovering US economy vs. the stagnation of the BRICS, the Fed raising interest rates, and our open capital account (which means that money can be invested and withdrawn easily from the US economy, unlike China, where capital controls make it very difficult to withdraw funds).

    One by one:

    China
    China is perceived to be gradually weakening the RMB vs the USD, since the RMB has been pegged to the USD and has strengthened in line with the USD over the last few years. This has hurt Chinese exports, so a depreciated RMB is expected to help the Chinese economy. The RMB has been depreciating steadily since the start of 2014, and has accelerated since August:

    [​IMG]

    Brazil
    Brazil's economy is circling the drain.

    Goldman Warns of Brazil Depression After GDP Plunges Again

    Effect, depreciation vs USD:

    [​IMG]

    Russia
    Sanction, economic contraction, conflicts in Ukraine, the Middle East, and Turkey. Not a recipe for success:

    [​IMG]

    India

    Still a relatively large trade deficit, and lack of trust in the institutions (i.e. no one knows if the GDP numbers are real or fake) leads to depreciation:

    [​IMG]

    The same is true across the emerging markets, to be honest. Turkey has a huge trade deficit, and its Islamist leadership is ostentatiously corrupt and has constantly attacked the central bank, leading to a loss of trust in Turkey's economic management. The Turkish Lira has been depreciating precipitously. South Africa's political leadership has been utterly incompetent, and the ZAR has depreciated precipitously. Etc.

    To answer your question, will the USD continue to strengthen against the BRICS? Probably, but the USD is already very strong vs. other currencies, so if it does continue to appreciate, it will probably be much more gradual than it has been over the last few years.
     
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  6. Falcon

    Falcon Major Staff Member Social Media Team

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    Thanks for the explanation, however I would argue that Turkey is doing ok considering the regional instability but that something for the Turks to discuss in another thread.:)

    Overall economy is improving but not in an amazing fashion. What actions do you think could be taken to help accelerate our economic growth in a stable manner?

    BTW do you do this type of economic stuff for a living?
     
  7. Strategist

    Strategist Officer Candidate

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    Relative to how bad it could be, sure, Turkey is enduring rather well. It isn't my intention to make this discussion political. But in the context of Turkey vs. the US, the market has spoken:

    [​IMG]

    This, unfortunately, is a political question. To avoid descending into a rant, I'll keep it very simple. The basic formula for calculating GDP (based on expenditure) is:

    GDP = consumption + investment + government spending + net exports

    I don't see any prospect for a sudden acceleration in consumption or jump in net exports (i.e. reduction in our net import situation). What remains?

    If you're on the left, you say what you have always said: more government spending!
    If you're on the right, you say what you have always said: create a more welcoming environment for investment!

    I believe that government has spent profligately over the last 7 years (government debt has doubled), and achieved little. There is much that can be done on the investment side, but there is virtually no prospect of that happening as long as a Democrat is in the White House. I won't go further, in order to spare the thread from over-politicizing the issue.

    Indirectly. I'm in finance.
     
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