Can Anyone Explain the Feds??

**boefixepa** · 06-14-2006, 08:12 AM

Re: Can Anyone Explain the Feds??

Nope, I'm with you. You know there's this saying or concept about when a man (general nutral meaning) gets a little bit of power, as they see it, (such a new job controling interest rates) it goes to their head and they get this 'god' or 'king' mentality. They enjoying seeing the power and influence their words can have. He probably smiles inside when he says something and then watches stocks fall. Thinking 'see...see the power of my words...come crawling to me begging that I stop..'

Well you get the idea.

**sweeps** · 06-14-2006, 11:29 AM

Re: Can Anyone Explain the Feds??

The Fed's job isn't easy, but it's an important one. The reason it toys with interest rates (and ultimately the money supply) is to level out the ups and downs in the economy. Most economists agree that steady, albeit slow, growth is much better than having massive ups and downs in the business cycle. The Fed tries to goose the economy when it's sagging and tries hitting the breaks when its running beyond it's normal capacity.

I personally believe the Fed has done a very good job at this since the Great Depression. There are exceptions of course: the 70's and our current situation. But honestly, the Fed's options are limited. If they go looser with the economy (i.e. lower rates which increases borrowing which increases spending), they take a huge risk in letting inflation go crazy (not good). If they go tighter with the economy (i.e. raise rates which reduces borrowing which reduces spending), they take a huge risk in causing another recession (also not good).

I assure you though, the Fed doesn't do this stuff just to stick it to you. There is at least some method to the madness.

**msnln** · 06-14-2006, 09:35 PM

Re: Can Anyone Explain the Feds??

As Sweepsplayer said, Fed tries to balance the economy by controlling Fed Funds Rate, which is overnight borrowing rates banks lend to each other. Fed's job is to gauge the economy and determine whether there is economic slowdown or inflation. When economy shows signs of slowing down, Fed lowers Fed Funds Rate to stimulate more borrowing from individuals and businesses, which leads to more spending and thus growth in economy. During inflationary periods, Fed raises interest rates to reverse spending, causing merchants to lower prices to induce consumers to buy and thus curbing inflation. Fed seems to be raising rates during boom times because when people or businesses have more money, they tend to be able to afford more things, and with more people buying more, merchants and manufacturers will be tempted to raise prices or come out with higher priced products -- think $300 jeans that are all rage these days. This is inflation.

Key is Fed has to stay ahead of economy and try to control it. Otherwise we have out of control inflation such as we have seen during the 70s.
I don't think Bernanke is doing anything wrong. We had oil prices go from $35 to $75, gold go from $300 to $750, and all other commodity prices that were up over the past two years is coming back down. Just look at real estate prices which peaked last year and is starting to come down. Greenspan had been raising rates before Bernanke took over in January and the effects are beginning to show with oil down today to around $68 and gold at $550.

We are seeing nervousness in the stock market for couple of reasons, even though all seems to be on track of the Fed. One is uncertainty about whether more rounds of rate increases are coming, which could potentially stall economic growth and cause recession. Second reason is tied to first and that is Bernanke does not have a track record. Even though he was one of members during Greenspan era, I don't think people have full confidence in him yet. Last thing Bernanke wants is to gain notoriety for saying things that will impact stock market. Most obvious example that comes to mind is Greenspans's comment during 1997 (1996 maybe) of "irrational exuberance" in US equity markets. Everyone made fun of Greenspan for that phrase when the market continued to rally for years, until finally crashing in 2000.

Markets around the world will obviously be impacted by US economy as US is the largest consumer in the world. When the US economy goes down, so does world economy.

**SuzeOFan** · 06-15-2006, 04:26 AM

Re: Can Anyone Explain the Feds??

Thank you everyone for the great explanations.

(Sigh) It's still a little fuzzy to me because maybe I'm just a little slower on the uptake than most!

During inflationary periods, Fed raises interest rates to reverse spending, causing merchants to lower prices to induce consumers to buy and thus curbing inflation.

This is what gets me.

I would be tempted to say gas prices (maybe housing costs?) are the reason we've been seeing an *inflationary* period. I still don't make the connection as to why this means the Fed has to raise interest rates.
It just means to me that we're paying more for everything now *in addition to* high interest rates on housing and loans.

Maybe I'm just seeing the short term view now. Prices are still high and haven't come down anyplace that I can see. Maybe all this will take time to see the effect?

BTW - Was the Fed on vacation during the Carter years?? I mean what was the story with that?

**msnln** · 06-15-2006, 05:09 AM

Re: Can Anyone Explain the Feds??

Inflation is caused by a lot of money chasing limited number of goods. Lets take housing as example. Reason home prices went up is because there were enough people that could afford to buy a house and drove the prices up by bidding higher to purchase the property to outbid next guy. If seller put house on the market and could not sell at the asking price, he would have to lower the prices until prices came down to level where there would be buying interest.

With interest rate (and mortgage rate) going up, cost of purchasing that same house has gone up and in order for the seller to sell that house, he will have to lower the price of the house to find a buyer. From consumer's point of view, I suppose even at lower price, higher interest rate offsets any reduction but to the Fed, that is reducing inflation. Hopefully, oil and other commodity price will trickle down to consumer level. I hope you see where I am going with this.

During Carter years, Feds did not have policy in place of adjusting interest rates to curb inflation. This was implemented largely by Greenspan. At that time, US had huge deficits incurred as result of Vietnam War and Great Society (war on poverty, medicare programs, etc) program initiated by LBJ. In order to finance the spending, government simply printed more money. More paper money with no economic growth means reduced value of dollar and thus inflation.

I hope this cleared up your questions. Please feel free to ask if I can help any further. I used to run a bond fund so I am fairly knowledgeable in this area.

**SuzeOFan** · 06-15-2006, 05:39 AM

Re: Can Anyone Explain the Feds??

Thanks msnln. That, and the other things that were said you and sweeps does make things clearer. I will need a little time to digest it.

I guess my big fear now is that Bernanke will go too far ...and we will be forced to revisit the Carter years...! (Me thinks he enjoys his job a little too much!)

I was just a tot, but I remember those loooong boring lines at the gas stations. And a lot of angry citizens!

/

I also seem to remember my Dad had a savings account for me with a bankbook I liked to look at. The interest rate at the time was something like 6.5%? Was I remembering correctly?

I wouldn't mind seeing that now! (but just that!)

**sweeps** · 06-15-2006, 05:42 AM

Re: Can Anyone Explain the Feds??

SuzeO, looks like you're not the only one with concerns.

**SuzeOFan** · 06-15-2006, 05:57 AM

Re: Can Anyone Explain the Feds??

So I guess the key question right now is,

Will the Feds have enough patience to let the interest rates take their course ...before reacting again?

**boefixepa** · 06-15-2006, 06:56 AM

Re: Can Anyone Explain the Feds??

If you want a fun read try - The Creature from Jekle Island -- It's about the creation of the FED.

Not sure where I stand on the issue...don't really know enough to make a real call, but I believe in the free market system and we really don't have one.

**neguy11** · 06-15-2006, 08:29 AM

Re: Can Anyone Explain the Feds??

I do understand the need to keep the economy steady, but it's just frustarating when you have a student loan that's gone from 8% interest to 11.75% interest. That's a big increase! I have looked and looked for a fixed interest private student loan and haven't found one. The best I could do was a loan based on the LIBOR + 2% and use that to pay off this insane 11.75% loan. LIBOR appears to follow the Prime, yet seems to always be a few percent lower. I am hoping this doesn't come back to haunt me!

Am I missing something? What prices are going up? I haven't really noticed anything.

**SuzeOFan** · 06-15-2006, 11:26 AM

Re: Can Anyone Explain the Feds??

I do understand the need to keep the economy steady, but it's just frustarating when you have a student loan that's gone from 8% interest to 11.75% interest. That's a big increase! I have looked and looked for a fixed interest private student loan and haven't found one.

neguy11, what is the amount of the student loan? I thought the hike on student loans didn't take effect until July. We had a Fanny Mae loan out for $7500. (I know small beans compared to what many have for student loans). We took $5000 from our tax return along with a little extra cash we had saved and paid it off completely. F.M. stinks. We just wanted to get rid of them as fast as we could ...and just in time too! I feel very bad for you young students faced with these unreasonable debts and soon to be interest rates.

To all college students out there - make sure the profession you choose will make enough to pay down that student loan!

There's suposed to be a ratio of what you are expected to make as a salaried professional - compared to the investment you put into your education.

11.75%? That's outrageous! Isn't there some way for you to find a lower rate by transferring it to a lower interest c.card or something?

**neguy11** · 06-15-2006, 11:51 AM

Re: Can Anyone Explain the Feds??

It was a Wells Fargo Collegiate Loan, not a Stafford Loan. Sounded like a great deal when I got it, then the Fed started going to town. Stupid me for getting a loan based on the prime, but like I said I don't think fixed student loans exist anywhere!

I have no idea what I am going to make when I graduate. I am going into accounting and want to work for the IRS most likely.

**msnln** · 06-15-2006, 01:21 PM

Re: Can Anyone Explain the Feds??

Will the Feds have enough patience to let the interest rates take their course ...before reacting again?

That is that is causing funk with the markets. Investors are concerned that if Fed takes this too far, we will have high interest rates and economy going into tailspin. However, there are still evidence of inflationary pressures from high oil prices, and recently, rising rental costs.

It is almost certain that the Fed will raise the rates at least one more time at the end of June. Fed Funds future trades in Chicago futures exchange and by looking at that you can gauge probably of future increases also.

Most are betting that interest increases are coming to end but we just do not know whether that will be this month, or if there are one or two more to come.

As for Bernanke seeming to like power, I disagree. He wants to be remembered for someone who saved US economy from "runaway commodity" prices of 2000s, not one who crashed US economy into recession.

**VJW** · 06-18-2006, 08:52 AM

Re: Can Anyone Explain the Feds??

Originally posted by msnln

Last thing Bernanke wants is to gain notoriety for saying things that will impact stock market.

Too late, he already gabbed to Maria Bartiromo:

Bernanke Blabs to Bartiromo

Most obvious example that comes to mind is Greenspans's comment during 1997 (1996 maybe) of "irrational exuberance" in US equity markets. Everyone made fun of Greenspan for that phrase when the market continued to rally for years...

And rightly so.

Greenie gave the warning of pending doom in the "irrational exuberance" speech on December 5th, 1996, when the Dow Jones Industrial Average was at 6,437. It has been some 4,000 points above that level for almost ten years.

until finally crashing in 2000.

There was no “crash” in 2000. That is simply a well worn canard propagandized by the RightWing noise machine.

For example, the DJIA began 2000 at 11,357.51 and closed 2000 at 10,786.85, a decline of a mere 570.66 points. Conversely, we just witnessed the DJIA go from 11,709.09 on this past May 10th to 10,653.23 on June 13th, a decline of 1,055.86 over a period of just 34 days.

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Can Anyone Explain the Feds??