I would say both play a role. Each analyst has a different opinion.
I forgot to mention that there is also a Federal Discount Rate, which is the rate the Fed borrows money to banks that are not able to get Federal Funds Rate (the overnight money from other banks described above). From the linked article:
The discount rate is set higher than the fed funds rate, and is intended to be used as a last resort for banks who are unable to borrow in the interbank market. The secondary discount rate is an even higher discount window rate of interest for Fed loans made to banks that are struggling with liquidity.
As this rate is for banks who are struggling it is not relevant to healthy borrowers. The ability to borrow to banks in distress is what makes the Fed a “lender of last resort”.
Jerome Powell’s term ends in about a year and I’m apprehensive about who Trump will nominate to replace him. I suspect he wants a Fed chair who is willing to do his bidding.
Uncertainty is the name of the game in financial markets, but on that you can bet your last dollar.
Hulk Hogan is the leading candidate but Kid Rock has a shot
I’m not going to try to understand Trump - I also don’t know what he wants other than what you have typed…but the reason someone would want the Fed to lower the rate is that it does things that make the stock market go up. Lending money is cheaper and leads to growth which leads to higher expected returns which leads to higher stock prices.
That’s what I would have said before reading some of the replies. Now I’m confused. What do Bonds have to do with the federal funds rate that would make that not true? The fed funds rate since 2009 has been 0% or near 0% until Covid, what happened during that time re: bonds, etc.? I do know the stock market gained 330%. That good run was built on “free” money (the 0%) and couldn’t last, but I doubt the fed rate of 0% was the “correct” rate a year or so after 2008.
I’m genuinely curious as I can be good at one thing, and completely miss the big picture right next to it.
Somewhat off topic, but I find it interesting that people seem to believe that there is some kind of ‘natural’ rate that the Fed ‘should’ be aiming for.
Span of time: it has fluctuated enormously, going as high as 20% in the 1980s…
I don’t think there is a “natural” rate, but there likely is a “most rational” rate at any specific time to achieve the goals of modest inflation and fairly steady economic growth with fairly low unemployment.
ETA: Just ninja’ed.
There is a sorta “natural rate”. But it’s not a fixed number. It’s the rate that keeps things running smoothly. I’d liken it to gently counter-steering into an incipient skid on an icy road.
If steered adroitly, the car stays in the lane. if the wheel is spun willynilly wherever, a crash is inevitable.
The Fed has historically tried to countersteer. Not always so adroitly, but that was their goal. But if the well-intentioned fairly skilled driver is exchanged for a blindfolded toddler, a wildly out of control spinning flipping end-over-end crash becomes a statistical certainty.
More importantly, the Fed needs to manage interest rates independent of the desires of the White House.
I don’t think it is off topic at all, in fact, you point at the problem. I hope you did not get the idea I claim it is possible to know the “right” rate of interest for a nation, because it is only possible to estimate the right rate for a political aim, for instance: 3% unemployment, or 2% inflation. And even that will depend on contingent external factors like the price of oil, a bad harvest, bird flu (see the price of eggs), or a war here or there. And it will have an influence on the exchange rate, which in turn will feed back into the whole process and influence the “right” rate. And then the political aims will have changed, priorities will have to be adjusted, and so on ad infinitum.
Now Trumps political aims – apart from staying out of jail, which he seems to have managed pretty well – are unfathomable, voluble, and perhaps for sale, but probably different from Mr. Powell’s, yours, or mine.
I doubt that too, it probably was too low. In fact, it was so unprecedented that they had to coin a new word for that situation: quantitative easing (QE). Just as they had to invent the word “tapering off” to stop it. We even got negative interest rates for some time, something I still have difficulties getting my head around!
The real magic is that they managed to do it (i.e.: flood the market with cheap money) for so long without argentinian style inflation levels. And that not one banker went to jail for the subprime scam, that is incredible too.
Right, who really understood the fact that tariffs could be imposed by executive order until it happened?
One wonders what else is lurking in Pandora’s box…?
As we have speculated previously in this thread: how fragile (or stable) is the whole financial system? Could there be a hyperinflation event in the US, if a sufficient number of negative feedbacks stop operating?
I don’t think anyone really understands economic systems on the global level.
‘Economics’ is not a science.
Absolutely. It was fraud plain and simple on a large scale.
Some dirty work obviously went on behind the scenes.
Only because he claims that he is acting in response to a national emergency and Congress does not have the guts (–> cojones) to say that is not the case. He is abusing his powers.
I believe it is impossible to know. We have to pretend it is stable, but nobody knows whether this is so.
Of course. Let us pray it does not happen, but it is entirely possible. It also could collapse completely without hyperinflation. Also very bad.
The Trump whisperer on tariffs has been Stephan Miran. His goal is intentionally weakening the dollar. He calls it the Mar-a-lago accord. Having money move into other currencies and leave reserve supplies is what he wants.
Just for non-political overview, and to see if I understand it, many countries intentionally weaken their own currency. It can be a good thing, and there is nothing inherently wrong with doing that. It’s a tool one can use to makes the country’s goods they export cheaper.
There are many pros to being the reserve currency of the world, but a con is being able to use the tools to weaken your own currency. It’s hard, because soooooo many other countries must buy your currency which strengthens the value. To an extent, it’s a bit out of your hands to be able to devalue it. I imagine then, if you truly wanted to weaken it, the way would be through radical policies like high tariffs. That would do it.
I think the pros of being the reserve currency greatly outweigh that con, and I’m not saying any of this is the right policy. It’s definitely not. Just that, if you want your exports to be cheaper/reduce your trade deficit, you can devalue your currency. While there are other tools short of stupid, it is harder for the US to do it like other countries can because of it’s unique situation in the world.
I accidentally replied to DSeid on this one but it was just a general post and not intended to be a reply to him.
So if Trump manages to fire J Powell or pull his security detail and stochastically kill him, where do you put your bets? I feel like the whole market would crash because the last adult in the room is gone, but can you think up better, more specific targets than that?
Also, re: holding shares after my call, I didn’t think about it but you could just sell most of your shares and keep the profit as shares. For instance I could’ve sold about 750 of my 800 shares and kept the 50 as fully owned shares with no margin rather than selling them all and taking cash as profit. That would’ve made more sense if I thought gold was going up and preferred to keep the profit in stocks.
Currency is an area I know very little about, but it seems to me that you would want a strong currency. We have the world do our low wage work (manufacturing, mining resources, etc) and then we buy that from them. It doesn’t matter if we have a trade surplus or shortage with any particular country. We buy the undesirable work from them (like trinket manufacturing) so that we can then pursue higher value, more desirable work in services. One of Trump’s trade guys said that maybe we could bring those jobs putting tiny screws in iPhones here. He was selling this as some big win, rather than giving us terrible low pay work no one would want.
There may be more to it that I’m missing, and there are a few areas where US manufacturing could be more competitive and still have desirable jobs come from that (say, Boeing vs Airbus), but the benefit we get from buying more foreign goods for the same dollar MASSIVELY outweighs the low wage low skill manufacturing they seem to want back that would be like 95% automated if it came here anyway.
I’m going to kind of assume that lowering the value of the dollar is some stupid Trump shit until someone tells me otherwise.
It would also suck for all the freshly made American expats who move to other countries to escape what the US is becoming.
That is why the Plaza Accord was considered such a landmark breakthrough. Trump would love to be as relevant, that is why Stephen Miran is dangling the prospect of a Mar-a-lago Accord in front of him. He would be tickled pink if it came to be, but I don’t beieve it is feasible. That is the problem when you forgo your credibility: who’s ever going to trust you? And who would voluntarily sign up for a default all but in name to their detriment just because it pleases him-who-must-not -be-named?
Things you read in the internet:
80% of Americans think the country would better off if more manufacturing was done here but only 25% would actually take those jobs.
No idea whether this is factually true, but I am ready to believe it.