[HN Gopher] Fed flags rate hike 'soon,' plans for 'significantly...
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Fed flags rate hike 'soon,' plans for 'significantly reducing'
balance sheet
Author : ckastner
Score : 21 points
Date : 2022-01-26 19:56 UTC (3 hours ago)
(HTM) web link (www.reuters.com)
(TXT) w3m dump (www.reuters.com)
| soperj wrote:
| Talk talk talk.
| sschueller wrote:
| Likely and soon isn't actually doing it. It seems they are
| kicking this turd down the road hoping that just the threat would
| make things turn around.
| boredumb wrote:
| two more weeks to flatten the balance sheet
| ipnon wrote:
| The fed balance sheet is absolutely massive.[0] One item that
| usually surprises folks not familiar with the money market is
| that the Fed owns 2.5 trillion dollars worth of mortgage-backed
| securities. That's 2,500 times a billion dollars worth of
| Americans' mortgages. If you are a homeowner in the United
| States, it's a good bet that the Federal Reserve has played some
| part in the financing of your very own home.
|
| This project of buying regular Americans' mortgages began during
| the Great Recession, when the government was willing to do
| whatever it takes to keep the economy from imploding more than
| eventually did anyway. You can buy a lot of homes with 2.5
| trillion dollars! This is a great example of a temporary program
| that inevitably became permanent. How would you even sell 2.5
| trillion dollars worth of anything? Who could buy it?
|
| [0]
| https://www.federalreserve.gov/monetarypolicy/November-2021-...
| jdsully wrote:
| The average mortgage is held for 8 years so theoretically
| they'd just age out if the fed stopped buying more.
| kbelder wrote:
| Yeah, but the fed stopping buying would cause a huge shift in
| demand. You can't really depend on any other variables in the
| market holding steady when such a large distortion is
| removed.
| naveen99 wrote:
| The us separates government debt from fed assets. If you net it
| out, the debt is even more massive, especially compared to some
| countries which just have sovereign wealth funds, a budget
| surplus, and no debt. best to just look at the global economy,
| and find your place in it.
| eutropia wrote:
| This might be a dumb series of questions but here it goes:
|
| Didn't we get into a huge mess because of mortgage-backed
| securities just 15 years ago?
|
| And you're telling me now instead of (i)banks owning them, the
| federal reserve owns them?
|
| Does anyone know what the general "rating" of those securities
| is? Isn't this dangerous?
|
| I know we trust our governments to handle things like nuclear
| weapons but this seems a bit more dangerous and opaque with far
| less oversight.
|
| Should we be concerned?
| VirusNewbie wrote:
| Banks are the federal reserve.
| gruez wrote:
| Only in the sense that banks hold shares in the federal
| reserve, but since the federal reserve is controlled by the
| federal government it's not really comparable to holding
| shares in JP Morgan Chase. It essentially functions as a
| government agency.
| disambiguation wrote:
| There's a lot about economics I don't understand.
|
| Could someone explain (or point me to a resource on) how raising
| rates helps to control / reduce inflation?
| AtlasBarfed wrote:
| Demand is currently greater than supply in so many ways (see:
| computer chips). A lot of inflation is because the suppliers
| can "gouge" customers. It's why the car makers are really
| profitable but selling way less: they only sell the expensive
| versions of what they can make, and then there is gouging on
| top of that by the dealers for example.
|
| But if you raise rates, then consumers and business buyers
| can't access as much money on cheap credit, so they buy less /
| delay / make do with what they have.
|
| Demand for goods drops, so the difference between demand and
| supply evens out.
|
| But slowing the exchange of goods and services means GDP slows
| ... is another way of saying "recession".
|
| Western economies have been floating on zero/negative credit
| for so long to keep their economies "stable" aka propped up.
|
| We'll see what happens...
|
| If you don't understand why the FED changing interest rates has
| such cascading changes, it's because all the banks that you
| would get a loan from peg their interest rates to the FED's
| (plus a markup), because the FED supplies money to banks when
| they need at by loaning it to them ... at the federal rate.
| scottiebarnes wrote:
| - Interest rate is the cost of borrowing money; if the cost is
| high, people/businesses generally borrow less
|
| - Borrowing money involves the creation of new money
| (fractional reserve banking); when you get a loan from a bank,
| they only have to have a certain portion of that backed by
| actual cash, the rest is created out of thin air. So you get
| your loan and spend it immediately. When enough people are
| borrowing, there is more money flying around; an economy can
| only produce so many "things" at once, so we have to compete
| over our purchases. This demand, fueled by borrowing, pushes
| prices up.
| voisin wrote:
| Raising rates means projects that would inevitably be paid for
| in part by debt would be more expensive than when rates were
| lower. So projects at the margin suddenly aren't profitable and
| are cancelled. Less demand at the margins means less pricing
| pressure upwards, so less inflation.
| cameldrv wrote:
| The simplest, most direct explanation is that debt markets are
| an auction. Low bond prices are equivalent to high interest
| rates. If the Fed wants to lower interest rates, it buys bonds
| using money it creates, pushing up the price of the bonds, and
| effectively lowering interest rates. When new money is created,
| it dilutes the value of existing money, causing inflation. If
| the Fed wants to lower inflation, it needs to create less
| money. To do that it needs to buy fewer bonds. Less bond buying
| causes bond prices to go down, and therefore interest rates to
| go up.
|
| Now, the real world is a lot more complicated than this, and it
| depends on what exactly is happening with all of that extra
| money, but this is the first order explanation.
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