#FederalReserve Is In A Pickle

Here is the status of the Federal Reserve Board (Fed).

bbpickle

Background

Over a year ago the Federal Reserve Board (Fed) stopped Quantitative Easing, aka the buying of securities in order to pump money into the economy to stimulate it.

Feeling the economy was stable, the Fed just raised the Fed Funds Rate.  That is the interest rate the Fed charges banks.

Today

However, several other nations continued to lower their interest rates  and some have a negative interest rate policy, NIRP.  Here is more info on NIRP.

https://michaelekelley.com/2016/01/31/japan-why-negative-interest-rates/

Now the Fed is in a pickle because the Fed will look foolish if they reverse course and lower the Fed Funds Rate.

What Is Normal?

https://michaelekelley.com/2015/02/11/fed-inflation-target-is-abnormal/

According to the above website, if the Fed wanted the Inflation Target to be 2%, then the Fed Fund Rate should be 2% plus 1.44% or 3.44%.  Then 3.44% should be the normal Fed Funds Rate.

What Are The Fed’s Options?

How does the Fed get back up to the normal 3.44% Fed Funds Rate?  It can do one or both of these:

1.  Set the long-term interest rate to set a goal OR

2.  Keep unchanged or raise the Fed Funds Rate OR

3.  Offer another round of QE.

The best option is to have another round of QE which has the most influence and least fear while leaving the Fed Funds Rate alone.

Kelley Monetary Policy Rule

The Taylor Rule involves raising the Fed Funds Rate 1 percent for each 1 percent in inflation.  We have no inflation so the Taylor Rule is of no help.

The Kelley Monetary Policy Rule states the Fed Funds Rate will be increased gradually (such as .25% each quarter) and QE will be reduced gradually to zero at a rate inversely proportional to the Fed Funds Rate.

When the Great Recession hit, the Fed lowered the Fed Funds Rate AND offered QE at the same time.  Why can’t the Fed raise the Fed Funds Rate AND offer QE at the same time?

This should eliminate any fear by the Fed or the financial market and get us back to normal.

Good luck.

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Japan – Why Negative Interest Rates?

A number of countries have implemented a negative interest rate policy (NIRP).  Why?

neg_int_rates

Generally Central Banks try to stimulate their country’s economy by lowering interest rates.  This encourages banks and businesses to issue loans or take out loans.

Japan had a +0.1 interest rate and had nowhere to go but negative to lower interest rates in order to stimulate their economy.

Here is how it works.  Banks usually pay interest to use your money.  Instead a negative interest rate works like a safe deposit box. You pay to have the bank hold your money.

Unfortunately, people would rather have cash which results in hoarding and does the opposite of stimulating the economy.

For more information, see this website:

http://www.bloombergview.com/quicktake/negative-interest-rates

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Hank Paulson Caption Contest

According to Hank Paulson, former Treasury Secretary, who helped save the big banks, there is a big difference between 2007 and now.

hank_paulson

 

Select your favorite caption for this photo.

1.  What inequality gap?  It has only grown by THIS MUCH!  Ha. Ha. Ha.

2. The Federal Reserve has kept interest rates at .025 for THIS LONG and credit card companies are still charging 24%.  Hee. Hee. Hee.

3. Thanks to my HUGE circle of friends, Goldman has 4 of the 5 regional Fed presidents voting in 2017.  Yuck. Yuck. Yuck.

4. The big banks have only gotten THIS MUCH BIGGER.  Ya ha ha.

5. My dachshund has grown and is this LONG now.  Ho. Ho. Ho.

Ok.  Maybe this isn’t so funny.

Earn 6% Risk Free Without Big Banks

Crowdfunding is doing what banks used to do – care about you. How about a hug?

6percent

How would you like to get 6% guaranteed interest without risk for your hard-earned savings?  Certificates of Deposits (CDs) are earning only about 1% at big banks. You could put it in the stock market and risk getting at most 4% to 10%.  But right now the stock market is very volatile with triple digit drops and rises. You could lose all your money.  That would be a -100% interest rate.

A safer arrangement is loaning your money to a crowdfunding company that in turn loans it to small businesses for a slightly higher interest rate.  Each crowdfunding company is the middle man of a perfectly legitimate transaction that big banks used to do.

Big banks are too busy giving 1% or less on savings while charging 26% on credit cards.  You do the math.  Big banks do not care about you at all.

Crowdfunding and crowd sourcing are really taking off as a means to raise money or get loans.  But most companies loan your deposits to small businesses.  Here is one such company.

https://lovefruitful.com/press-releases/financial-startup-waters-fruitful-seeds-for-savers-and-business-borrowers

I am not the only one talking about this.  Here is Clark Howard discussing crowdfunding.

http://www.clarkhoward.com/news/clark-howard/personal-finance-credit/crowdfunding-offers-new-twist-p2p-lending/nCtcp/

Here are two popular peer-to-peer websites that also deals with loans.

https://www.prosper.com/invest/

https://www.lendingclub.com/public/steady-returns.action

With the stock market being very volatile, now is a great time to get 6% guaranteed.