TPS Posted December 20, 2018 Share Posted December 20, 2018 22 minutes ago, sherpa said: Nonsense. The Fed does not "control short term interest rates." The Fed controls the Fed funds rate, which is the rate banks make overnight loans to each other on money deposited at the Federal Reserve. They also control the discount rate, which the rate banks pay when they borrow directly from the Federal Reserve. To claim they "can set short term rates at any level they want" is preposterous. They operate in a free market. They have a huge influence, but the market determines what interest rates are based on supply and demand. It is a giant misunderstanding to claim that the Fed controls rates. In a relatively balanced market, it is easy to make such a claim, but it isn't true. If you invest, I dare you to fight the Fed. Fed funds are the cost of banks’ funds, and the prime rate is a mark up of 3% over this cost. The Fed controls this rate period. The Fed can also control any rate it wants, as it showed with QE in the long term treasury market and the MBS market. You are seriously misinformed. As I recall, you are the person who thinks the size of the Fed’s balance sheet is a problem too... 16 minutes ago, DC Tom said: They just get hired back as contractors for twice the cost. Did they outsource it through Halliburton? 1 Link to comment Share on other sites More sharing options...
sherpa Posted December 20, 2018 Share Posted December 20, 2018 (edited) I trade actively. Did so today. Interest plays and derivatives of that market are easier than stocks. Allowed me to retire early and is still my interest. The common perception is that the Fed controls interest rates. That is the perception they want to maintain, but it isn't, at the most basic level, true. The Fed is reactive, but it is kind of like the police force. If the masses decided to revolt, there isn't a police force in the world that could stop it. As long as the market goes along, Fed control of the discount rate and Fed funds rate works, but if the market moves aggressively in one direction, its quiver is limited. By the way, it isn't my habit to hit people, but the Fed does not control the "Prime rate," and can't control "any rate it wants," which is what you claimed in your post, and I'd look critically at who you think is "seriously misinformed." Edited December 20, 2018 by sherpa Link to comment Share on other sites More sharing options...
TPS Posted December 20, 2018 Share Posted December 20, 2018 1 hour ago, sherpa said: I trade actively. Did so today. Interest plays and derivatives of that market are easier than stocks. Allowed me to retire early and is still my interest. The common perception is that the Fed controls interest rates. That is the perception they want to maintain, but it isn't, at the most basic level, true. The Fed is reactive, but it is kind of like the police force. If the masses decided to revolt, there isn't a police force in the world that could stop it. As long as the market goes along, Fed control of the discount rate and Fed funds rate works, but if the market moves aggressively in one direction, its quiver is limited. By the way, it isn't my habit to hit people, but the Fed does not control the "Prime rate," and can't control "any rate it wants," which is what you claimed in your post, and I'd look critically at who you think is "seriously misinformed." I said the prime rate is a mark up over the Fed Funds rate which the Fed has absolute control over. The Fed controls the supply of reserves which is the source of the FF market. Banks borrow and lend the existing supply, of which the Fed controls completely. The Fed's quiver is unlimited, which allows it to intervene in any market it wants to any degree. If the Fed decided to set a target on the 10-year (or any maturity) treasury yield, it could. The Fed displayed this power from 2008 - 2014. It bought $4 trillion worth of assets over this period, and it could just as easily have bought $10 trillion, but then we would no longer call it "the market system." sorry if I hit you. Link to comment Share on other sites More sharing options...
plenzmd1 Posted December 21, 2018 Share Posted December 21, 2018 watched this last night(no football on tv!!!!) really interesting..and scary! Link to comment Share on other sites More sharing options...
sherpa Posted December 21, 2018 Share Posted December 21, 2018 13 hours ago, TPS said: I said the prime rate is a mark up over the Fed Funds rate which the Fed has absolute control over. The Fed controls the supply of reserves which is the source of the FF market. Banks borrow and lend the existing supply, of which the Fed controls completely. The Fed's quiver is unlimited, which allows it to intervene in any market it wants to any degree. If the Fed decided to set a target on the 10-year (or any maturity) treasury yield, it could. The Fed displayed this power from 2008 - 2014. It bought $4 trillion worth of assets over this period, and it could just as easily have bought $10 trillion, but then we would no longer call it "the market system." sorry if I hit you. I'm quite aware of how the Fed works and its open market operations. I'm also aware of the "prime rate," and that the Fed does not "control" it. Of course it has a huge influence over the rate, but interest rates are still "controlled" by supply and demand. "The third rate, called the Prime Rate, is the rate that most people falsely believe the Fed changes. In truth, this is the one rate the Fed has no direct control over. Even more surprising to many investors is that the term "prime rate" doesn't refer to any single rate. The term simply refers to the rates banks give their best customers on borrowing money. This rate can and does vary slightly from bank to bank and may indirectly fluctuate as the Fed changes the other two types of rates. https://www.thebalance.com/what-interest-rates-does-the-federal-res795259erve-control- Central Banks have immense control over these issues, as long as things are "normal." Nonetheless, when things get abnormal, it is supply and demand, as always. Argentina and Venezuela have proven this. The US has many advantages over those, but it is not absolute. Link to comment Share on other sites More sharing options...
plenzmd1 Posted December 21, 2018 Share Posted December 21, 2018 (edited) BTW, for all those who asked .."you might not like Trump, but hows your 401K doing? I got the double whammy now!!!? Edited December 21, 2018 by plenzmd1 1 Link to comment Share on other sites More sharing options...
GG Posted December 21, 2018 Author Share Posted December 21, 2018 You're both wrong and right. FF rate steers the direction of the interest rates, but the actual wholesale rates are set in the bank markets, most commonly Libor. Prime rate isn't the lowest rate that banks charge their best customers. It's almost always Libor plus a spread. If a customer is paying Prime, it's either in trouble or there's a hiccup in the debt markets. Link to comment Share on other sites More sharing options...
TPS Posted December 21, 2018 Share Posted December 21, 2018 46 minutes ago, sherpa said: I'm quite aware of how the Fed works and its open market operations. I'm also aware of the "prime rate," and that the Fed does not "control" it. Of course it has a huge influence over the rate, but interest rates are still "controlled" by supply and demand. "The third rate, called the Prime Rate, is the rate that most people falsely believe the Fed changes. In truth, this is the one rate the Fed has no direct control over. Even more surprising to many investors is that the term "prime rate" doesn't refer to any single rate. The term simply refers to the rates banks give their best customers on borrowing money. This rate can and does vary slightly from bank to bank and may indirectly fluctuate as the Fed changes the other two types of rates. https://www.thebalance.com/what-interest-rates-does-the-federal-res795259erve-control- Central Banks have immense control over these issues, as long as things are "normal." Nonetheless, when things get abnormal, it is supply and demand, as always. Argentina and Venezuela have proven this. The US has many advantages over those, but it is not absolute. I’m sorry I haven’t been clear: the Fed controls the fed funds rate. The prime rate is a 3% markup over ffr. Do banks have to raise the prime when the fed raises its ffr? No, but they always do else their profits will fall. Almost all large banks move in lock step. Again, The Fed controls the supply of reserves which allows it to control the FfR regardless of the demand. Mad for abnormal times, we just went through 6 years of abnormal, and the Fed has shown it can and will intervene to provide liquidity in any market to any degree. We simply disagree. Link to comment Share on other sites More sharing options...
Chef Jim Posted December 21, 2018 Share Posted December 21, 2018 50 minutes ago, plenzmd1 said: BTW, for all those who asked .."you might not like Trump, but hows your 401K doing? I got the double whammy now!!!? If you are ten plus years away from retirement and dollar cost average into a retirement account such as a 401k this market had actually been good for you. In order for the market to go up it has to go down. Link to comment Share on other sites More sharing options...
TPS Posted December 21, 2018 Share Posted December 21, 2018 9 minutes ago, GG said: You're both wrong and right. FF rate steers the direction of the interest rates, but the actual wholesale rates are set in the bank markets, most commonly Libor. Prime rate isn't the lowest rate that banks charge their best customers. It's almost always Libor plus a spread. If a customer is paying Prime, it's either in trouble or there's a hiccup in the debt markets. Libor was important. Too much fraud by the banks manipulating it has it going by the wayside. Yes, the prime is the nominal quoted rate that is the starting point for customers. Warren buffet will be charged a lower rate than you or me. Link to comment Share on other sites More sharing options...
GG Posted December 21, 2018 Author Share Posted December 21, 2018 2 minutes ago, TPS said: Libor was important. Too much fraud by the banks manipulating it has it going by the wayside. Yes, the prime is the nominal quoted rate that is the starting point for customers. Warren buffet will be charged a lower rate than you or me. Notice how 10 years after the fact Libor is still alive and well? If there was a better solution, it would have been implemented. The main wrongs about Libor was the unverified self disclosure of the rates, which encouraged lying during the crisis. Fix that disclosure problem and you eliminate Libor "problems" As an aside, the gaming of the Libor rates actually lessened the immediate impact of the crisis. Link to comment Share on other sites More sharing options...
plenzmd1 Posted December 21, 2018 Share Posted December 21, 2018 2 minutes ago, Chef Jim said: If you are ten plus years away from retirement and dollar cost average into a retirement account such as a 401k this market had actually been good for you. In order for the market to go up it has to go down. i ain't wanting no ten years..I want today!!!!!! And I aint no ten years away..more like 2! or 1 or 6 months But that's another story BTW, I was one who was liking the 10% sell offs...as they say trees don't grow to the sky...just don't want to see 45% selloffs!!! Link to comment Share on other sites More sharing options...
Chef Jim Posted December 21, 2018 Share Posted December 21, 2018 3 minutes ago, plenzmd1 said: i ain't wanting no ten years..I want today!!!!!! And I aint no ten years away..more like 2! or 1 or 6 months But that's another story BTW, I was one who was liking the 10% sell offs...as they say trees don't grow to the sky...just don't want to see 45% selloffs!!! Even better. You don’t want to retire at the top of a bull. That is disaster waiting to happen. ? 1 Link to comment Share on other sites More sharing options...
plenzmd1 Posted December 21, 2018 Share Posted December 21, 2018 1 minute ago, Chef Jim said: Even better. You don’t want to retire at the top of a bull. That is disaster waiting to happen. ? BTW, I did not say my wife was gonna retire too...have to maintain my lifestyle after all Link to comment Share on other sites More sharing options...
TPS Posted December 21, 2018 Share Posted December 21, 2018 (edited) 21 minutes ago, GG said: Notice how 10 years after the fact Libor is still alive and well? If there was a better solution, it would have been implemented. The main wrongs about Libor was the unverified self disclosure of the rates, which encouraged lying during the crisis. Fix that disclosure problem and you eliminate Libor "problems" As an aside, the gaming of the Libor rates actually lessened the immediate impact of the crisis. The death of libor was dictated by uk regulators last year, not 10 years. When the rates are dictated by a very small club, it’s too easy to manipulate. Market participants no longer want this type of “administered” system as well. Regardless, the main point stands: the Fed controls the FFR and the stated Prime rate is a 3% markup. If anyone doubts this, just look up the published numbers. Edited December 21, 2018 by TPS Link to comment Share on other sites More sharing options...
GG Posted December 21, 2018 Author Share Posted December 21, 2018 16 minutes ago, TPS said: The death of libor was dictated by uk regulators last year, not 10 years. When the rates are dictated by a very small club, it’s too easy to manipulate. Market participants no longer want this type of “administered” system as well. Regardless, the main point stands: the Fed controls the FFR and the stated Prime rate is a 3% markup. If anyone doubts this, just look up the published numbers. Set to be phased out by 2021, maybe. Don't understand why you are fixated on the FF definition. Sherpa's point was that the actual rates paid by everyone is dependent on the market. The Fed may control FF rates, but they don't control the market spreads, which are far more important. Link to comment Share on other sites More sharing options...
Tiberius Posted December 21, 2018 Share Posted December 21, 2018 Quote Asian stocks fell further Friday after Wall Street slid on recession fears, with Chinese stocks on track to end 2018 as the world’s worst performing market, with a loss of around 24%. Trade tensions between the U.S. and China have also re-emerged as concerns for investors. Looks like those welfare payments to farmers will have to be kept up for some time. Tax and spend our way to... Link to comment Share on other sites More sharing options...
TPS Posted December 21, 2018 Share Posted December 21, 2018 7 minutes ago, GG said: Set to be phased out by 2021, maybe. Don't understand why you are fixated on the FF definition. Sherpa's point was that the actual rates paid by everyone is dependent on the market. The Fed may control FF rates, but they don't control the market spreads, which are far more important. I'm not fixated on a definition, I'm fixated on the issue of whether the FED sets the FFR (my position) or whether the market does (Sherpa's position). The Fed sets it because it controls the supply of reserves. When the FED raises the FFR, ALL short rates rise with it. Sherpa suggests "the market" ultimately controls the rate, which is just not true. You can quibble about spreads being slightly different than the stated prime rate, but that's like saying all oil prices are equal to the price of the WTI benchmark--all prices move as the benchmark moves. In the short rate market, The FED sets the benchmark FFR (which is the ultimate cost of funds banks face), and all other rates move based on it. If someone wants to give me an example of when the market set the FFR, then I'm all ears. Link to comment Share on other sites More sharing options...
GG Posted December 21, 2018 Author Share Posted December 21, 2018 3 minutes ago, TPS said: I'm not fixated on a definition, I'm fixated on the issue of whether the FED sets the FFR (my position) or whether the market does (Sherpa's position). The Fed sets it because it controls the supply of reserves. When the FED raises the FFR, ALL short rates rise with it. Sherpa suggests "the market" ultimately controls the rate, which is just not true. You can quibble about spreads being slightly different than the stated prime rate, but that's like saying all oil prices are equal to the price of the WTI benchmark--all prices move as the benchmark moves. In the short rate market, The FED sets the benchmark FFR (which is the ultimate cost of funds banks face), and all other rates move based on it. If someone wants to give me an example of when the market set the FFR, then I'm all ears. I'll let sherpa describe what he was referring to, but my interpretation is that while the Fed sets the FF, and that essentially controls the stated Prime rates, there is a loose correlation between them and the market rates, because you are not factoring the risk spreads. You only talk about the regular 2.75 -3.00 spreads between FF and Prime. The bond and loan markets work on risk spreads, which fluctuate much more than the central bank rates. Link to comment Share on other sites More sharing options...
Buffalo_Gal Posted December 21, 2018 Share Posted December 21, 2018 Look for another painful day in the market The Q3 GDP was revised down to 3.4% from 3.5%. Q4s outlook stands at 2.8% (still considered very good). Link to comment Share on other sites More sharing options...
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