Fed Raises Rate to 4.25%, Drops Reference to `Accommodation'

[swag]

http://quote.bloomberg.com/apps/news?pid=10000006&sid=a6WBr0r7_Ev8&refer=home

Dec. 13 (Bloomberg) -- Federal Reserve policy makers raised the main U.S. interest rate to 4.25 percent, the 13th rate boost in a row, and signaled they may soon end their run of increases.

The Fed kept a pledge to raise its main rate at a ``measured'' pace, a phrase that has been in every interest-rate statement for 18 months. The central bank stopped saying there is ``accommodation'' in its policy, a sign that members consider rates high enough that they're no longer spurring economic growth.

``The committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance,'' the rate-setting Federal Open Market Committee said in its statement after meeting today in Washington. ``Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained.''

The FOMC's unanimous decision lifted the overnight bank lending rate by a quarter percentage point to the highest since May 2001. With today's language change, Chairman Alan Greenspan is revising the Fed's rate outlook less than two months before he retires and is leaving his successor, White House adviser Ben Bernanke, with a freer hand to set policy.

``The Fed is reaching a turning point in terms of its policy and it is also clearing the decks for Mr. Bernanke's move to the chairmanship,'' said Tom Schlesinger, president of the Financial Markets Center, a Howardsville, Virginia, research group that studies the central bank. He spoke in an interview before the announcement.
. . .

[swag]

1. Wow, stock market likes that.

Dow up 80 in five minutes.

[montanacowboy]

2. Adjustable rate mtg owners watch out

13 rate increases - unbelievable! and where is inflation? such bullshit

[AnneD]

34. The inflation

is from the printing press that is working OT.

[stepnw1f]

3. In About A Year I Will Be in Big Doodoo

I have a ton of money in student loans and the variable interest is rising every month.... in short, I'm screwed. And oh... there goes my Social Security too! I may as well learn to live off the streets now.

[texpatriot2004]

4. I am in that boat too nt

[stepnw1f]

20. I Got a Paddle

you have a boat? Mine is sinking...;)

[tx_dem41]

5. Or you could just finish school, get a good job and work hard. n/t

[stepnw1f]

14. Or You Could Mind Ya Biz

Am working and have graduated, smart ass.

[tx_dem41]

16. You were the one that mentioned your personal finances on the

WORLD wide web. If you want people to mind their own business, don't mention it in the first place.

[Name removed]

17. Deleted message

Message removed by moderator. Click here to review the message board rules.

[tx_dem41]

18. Much better. n/t

[OzarkDem]

31. Sorry, that's not called for

DU isn't the kind of forum where people make ad hoc attacks on each other.

Someone lamenting the situation that they and others will be in as interest rates rise because of Bush's bankrupt economic policies certainly doesn't justify a personal attack on the one who posted it.

Dems aren't usually the type to insult others and make themselves feel superior at someone else's expense.

[Media_Lies_Daily]

28. How perfectly sanctimonius of you.

[tx_dem41]

47. Being responsible with your life is sanctimonious?

When someone (who then admits to finishing their education and having a job) starts saying "Well, I can't count on my SS in the future" and "Time to plan on living on the street", possibly they could stand some reality. They should stop being defeatist because that attitude surely doesn't help the people that truly are in much more dire straits.

[superconnected]

40. In india of course.

[tx_dem41]

48. No....here in the United States.

I know of many people that have followed that formula and they are truly happy in life.

If you want to be like everyone else and be defeatist, I wonder why you spend your time in politics. Leaders aren't defeatists.

[Selatius]

66. No, they aren't defeatist, just corrupt. n/t

We have too many of those for every one who isn't corrupt.

[superconnected]

67. I'm not here to spend my time educating you

So my suggestion is you do like I did, and go to college. Taking economics and any financial class you can get your hands on will help you. So will statistics and math classes. Measurement theory and game theory are also good.

Then, you can get a really good job as I did - while most of my peers are still unemployed because their jobs were sent to india.

And you can open a business as I did - the only stability in an economy that is sending hundreds of thousands of jobs out of the country.

At that point, your real world experience may help you to keep your head out of the water, as mine does.

For now, I'll just consider your education is not well rounded enough to interpret the wall street journal.

Oh, and please add some science classes and by all means a LOGIC class. That will help your reasoning ability - ie you won't conclude that someone saying, "jobs are in india" is a person who is a defeatest. Instead you will have DEPTH to COMPREHEND what they are saying and hey you may even figure out why they would make that statement.

Just some suggestions from a college educated professional and business owner.

[tx_dem41]

68. Thank you for your advice.

Luckily, I have done all of those except for owning my own business.

I have an engineering degree from a strong engineering university. I have taken many economics classes as well as taking Stats and Probability as part of my engineering curriculum. I worked hard to get that good job, and worked hard to maintain it and better myself over the 18 years I have held it. I am surrounded by people at work that realize to maintain your position and even better it, you have to constantly be adding to your education and skills. As a result, we haven't had jobs bleed to India, because we realize that it is a competitive world, and we have to stay ahead of the competition. Oddly enough, although it takes some mental sweat, it is also quite rewarding.

We choose not to sit back and consider ourselves victims of outside forces. We choose to be in control of our lives, and blame ourselves if we set minor or major setbacks.

[superconnected]

70. Boy are you blind to American Business.

I don't care how much you keep up on your education, expecting your company to be loyal to you and continue granting you the privilege of working there, when they can replace you with cheaper labor outside the country, is very blind to how business actually works.

In this economy it is the high paying professional jobs that are leaving. Low jobs like manufacturing and tech support left years ago. Programming left 3 years ago and Engineering positions are leaving now.

Perhaps you should crack open a wall street journal.

And like I said ANY economics or fiance class will help you. Tell your teacher the advice you dispensed here. "Go to college, get a good job and work hard", is exactly what Financial advisers are speaking against now. If you're not taking entrepreneural studies or pursuing a job that can't be outsourced (ie medicine) you are going to run into trouble.

My friend from Microsoft(sitting here) with 2 graduate degrees, who lost her job last year when her whole department was outsourced to India, can't stop laughing...

[tx_dem41]

71. And you're blind to what I am writing.

Why do you think I am constantly upgrading my skills and education??? Because I know that companies are not LOYAL! It's my responsibility to maintain my employability. Not anyone else's. I take full responsibility for that. I learned that lesson early on when I was laid off from my first job out of college. I learned a related, but new field and its paid off so far.

I read the WSJ about 3-4 times a week. I know what fields are most vulnerable to outsourcing which explains why I am in the field I am in. It isn't vulnerable. If I ever felt it was, I will move onto a new field with newly acquired skills. People in my area of engineering are doing it constantly, and successfully. The key is not to corner yourself into one narrow area, such as what happened to many ITers (like possibly your MS friend). A lot of people thought the bubble would never burst (again, like possibly your MS friend). But then again, a lot of people learned how foolish that thinking was. Did your friend learn that?

[superconnected]

74. I think we are all constantly upgrading our education.

The last class I took was monday night - in measurement theory.

However your posts are ignoring that it doesn't matter how much you upgrade your education, your job still has the potential of moving to INDIA. Especially if you are a professional.

The qualifying factor is your wage and not your education.

My microsoft friend is employed again as a devoloper.
Nothing got obsolete that she did - .net programming is still here and flourishing. - all that changed was her job was switched to india. Any company she goes to can do this. No pigeon hole-ing about it. Gee I guess YOURE not getting it.

I guess we'll just have to wait until you find out personally.

[tx_dem41]

78. My job has 0% chance of going...

to India. Believe me.

[superconnected]

80. well that's nice.

Guess your advice only applies to you then.

anyway, good luck.

[SpiralHawk]

51. Oh yeah, tx, and then live happily ever after....

paying usurious interest fees to fat cat NeoCon Republican Cabal Shysters.

Very helpful advice. Love the scenario.

[tx_dem41]

58. If you don't see that educating yourself, getting a good job and..

working hard is helpful advice, then let me ask: What is your advice? To whine on the Internet? Where is that getting you?

The reason people pay "usurious" interest fees are because they have a bad credit rating. They have a bad credit rating because at least once (probably more than once) in their life they were horribly irresponsible with paying money back that they owed. Do you think you are entitled to borrow someone else's money and not pay it back? That's called STEALING. And, people should be punished for stealing, right?

[MissB]

19. Can you consolidate and lock the rate?

[stepnw1f]

21. Not a Private Student Loan

They told me basically I could consolidate multiple private student loans into one, inititially reducing rates, but cannot lock the variable. I have been paying off my loans as much as possible in the mean-time while working fulltime... but the rate keeps going up.

[MissB]

22. Well that sucks.

I hope you're able to get out from under them fairly soon.

[stepnw1f]

24. Not Gonna Happen

and haven't been able to find the money to pay it off sooner than later. Still working away at it though.

[x50600]

33. Me too.

Ive been going to school for quite some time. I have about $150,000 that thier now going to take out of my SS ;(

might as well give up now, Especially with this HORRIBLE * economy. There is NO way i will ever find a job.

[ckramer]

45. what were you studying in college?

$150,000 debt?

[x50600]

54. Hey

Im going into a very special area of study in computers and ive been in college for the last 8 and a half years.

[tx_dem41]

69. Self-delete.

I guess I don't want to play those games.

[x50600]

75. Self-delete

self-delete

[tx_dem41]

77. Self-delete

Self-delete.

[x50600]

79. Self-delete

Youre right, We shouldent be finger pointing at this time.

[orwell]

6. Notice...

...how nobody in the MSM even questions the appropriateness of ST interest rates being set by our equivalent of the Politburo. Our so called "free markets" are ruled by central planners not so dissimilar, in both power and interests served, to the "evil Commies".

Of course, our central planners are "wise men" with only the "good of the people" as their interest.

And we all know that "inflation is dead," unless you are in the market for gas, food, a home or energy to heat it, healthcare, or a number of other "luxuries."

Capitalism...in your dreams...or nightmares...

A pox on all their houses...

[Yavin4]

8. The Fed Exists To Protect The Value of the Wealthy

That's their real function. The ONLY threat to wealth in the U.S. is hyper-inflation. That's it. In other countries, the wealthy live in fear of government coups, invasion, over-taxation, etc. In this country, rising inflation is their only fear, and the Fed's job is to monitor inflation.

During Greenspan's tenure, he has taken that role and expanded it. Now, the Fed is actively involved in ensuring that the political process only elects pro-wealthy, pro-global corporations, and anti-social spending politicians. He deliberately manipulated interest rates to ensure Bush's re-election and the re-election of a Republican-controlled congress. He feeds the fire about the collapse of SS, without simply advocating raising taxes on the wealthy to offsee such a collapse, and he endorsed Bush's tax cuts, which was the ultimate betrayl.

By 2001, the Congress had painfully accepted fiscal responsibility, many Democrats lost their seats because of it. Greenspan, who was the biggest champion of fiscal responsibility, stabbed them in the back by endorsing a one-side tax cut program proposed by Bush which spelled the death of fiscal responsibility.

In the end folks, understand one thing, the system works against all of us. You have to stay ahead of the game at all times.

[orwell]

13. The great threat...

...is not hyper inflation as far as the Fed is concerned. Bernanke has clearly stated that the real threat, as far as the Fed is concerned, is deflation ala Japan in the last decade. In a deflationary scenario, the mountain of debt that is the fuel for the US economy would crash and burn, taking many financial institutions (and the dollar) with it. It would also destroy the recent big engine of US "pseudo-growth", the real estate market.

You can be assured that if deflation is seen as the enemy, it is ultimately your friend. In other words, the Fed is fighting the wrong fight. But that is what happens when the very structure of your organization is in direct opposition to your stated reason for existence.

The open market operations, interest rate targeting policies of the Fed are an anathema to true wealth creation. They skew investment toward non productive financialization and away from basic research and development. They allow the relentless march of inflation since the 30's, which is a disincentive to savings and an absolute disaster for the non asset holding lower classes. This is at the root of the destruction of the US civil society, its latest incarnation being the triumph of so-called "neo-liberalsim."

You can't have free markets when money supply is enslaved by the Fed. It is a contradiction in terms.

I agree with your political observations. It is clear that Greenie engineered Bush's first coup.

Thanks for the post Yavin...

[54anickel]

60. Personally, I think Chopper Ben is full of poop. His deflation speech

was a red herring, just an excuse to fire up the printing press. He used the fear of a Japan style deflation to support his argument. I don't believe we can suffer deflation in the same way as Japan because the buck is the world's reserve currency. He just can't compare it with the yen (or any other currency for that matter). But, like I said, that's only my personal opinion. There are lots of good arguments on both sides of the inflation/deflation prognosis that this path to ruin will lead. I do believe that something has got to give sooner or later.

I agree with Yavin's observation that hyper inflation is the only great threat to the wealthy. Of course it doesn't do the rest of us any good either, but the Fed does operate with the best interest of the wealthy at heart. That is how I took Yavin's comment anyway.

I certainly agree with the rest of your post - very well said. "Non productive financialization" is the best description I've seen that encompasses hedge funds, derivatives, CDOs, etc that are Greenspin's addition liquidity providing pets. Can I steal that phrase?

Thanks

[orwell]

73. Steal Away...

...I just pulled it out of thin air (or my addled brain...same difference.)

While hyper inflation would hurt some of the assets in the upper class investment portfolios, it would likely mark up real estate assets, physical commodities especially oil and gold, pay higher returns on new bond investment (while clobbering bond prices on existing holdings), and even benefit some equity investments while punishing others. In essence, those with physical assets would have their purchasing power maintained through the appreciation of those assets. Some of the financial assets would be impacted positively, some negatively. But through portfolio management, real purchasing power (or claims on the productive output), could remain unaffected even in hyper inflation. The dollar problem could even be addressed through diversification or even hedging in foreign currencies or gold.

But hyper-inflation for the lower economic classes, those who are part of the rentier society, the ability to adjust would be almost non-existent. They would get it on all sides through rising interest costs on debt, rising rental prices, rising food and energy prices, compounded by an inability to command higher wages due to the base commodity nature of their labor output. (A grave digger can not vote himself/herself a raise.) These price increases would be on discretionary and non-discretionary purchases alike, so there would be little ability to adjust consumption patterns to maintain the standard of living. Do you eat or pay the power bill?

Does that mean the Fed considers hyper-inflation benign? No. But I do think the Fed does fear deflation far more than hyper-inflation, primarily because of the mountain of debt supporting US assets/economy. Under Greenie's watch, total US debt both public and private has increased more than under all the other Fed Governor's combined. Forget what they say in public, this speaks for itself. There was more than one occasion when Greenie could have allowed a deflation to take hold, the most recent is in the 2001-2003 period. Instead he presided over one of the great money pumping exercises of all time, doing anything he could to replace the stock market bubble with the real estate bubble. Money is like water, it has to flow somewhere.

In the end I watch what they do, not what they say they do.

Thanks for your reply to my post. Cheers ;)

[AnneD]

36. The hell with staying ahead of the game,

I am starting to think about taking the board and game pieces away. The field needs to be leveled a bit.

[DBoon]

10. they only care about wage inflation

as it is the main cost affecting their profits.

The eroding American standard of living is to be fixed by moral stamina, not by macro-economics. You gotta take individual responsibility, pull yourself up by your bootstraps, etcd

[orwell]

15. You are correct...

...about wage inflation and profit growth,although this is somewhat ameliorated by the vast offshore labor pools, allowing US corporations to have the best of both worlds, subsidized borrowing (free money from the Fed) with flat to falling wage rates. Many companies can expand without adding new (expensive) domestic labor so a greater proportion of sales goes to the bottom line.

Individual responsibility is lessened as a virtue when the very basis of your capital system is being undermined daily by central planning. The Fed is constantly in the market, effectively directing capital flows. This is also accomplished through tax breaks and other "special favors" in legislation. The greatest source of disequilibrium economic policies comes right out of Washington, urged on by the very interests who claim to abhor "big gubmint." The primary beneficiaries of our government's "central planning" are the large multinationals who can write trade, environmental, and financial laws to assure them a tilted playing field.

There is nothing more despised in the US than free markets, contrary to the daily spin. That is why we do everything in our power to undermine our liberty.

Thanks for your post.

[DBoon]

23. And I was being sarcastic about the bootstraps

The central bank supports the wealthy

The rest of us fend for ourselves

[David Zephyr]

7. Heartless bastards.

This really hits the poor, the working class, students the hardest.

[Zynx]

25. In all fairness, if they kept interest rates below 3% or even 4% forever

inflation would do far more damage to the poor and the working class.

[David Zephyr]

35. There is NO inflation. None.

What inflation are you talking about.

The only thing that has gone up is energy costs and even that has not really triggered true inflationary pressures that would merit these interest increases.

Further, raising interest rates does not impact the cost of foriegn oil. None.

To the contrary, the poor and working poor and students who must finance their used cars and student loans and/or who have variable interest rates which are popular with first time homeowners who are just starting out, raising interest rates is murder to them month after month.

There is no rational for raising rates whatsoever now. And there was no rational for Greenspan keeping rates arbitrarily high for years in the late 1990's when there was no inflation then either.

Alan Greenspan is a banker's banker and I'm certain that his loved ones are all making a bundle.

[Zynx]

37. There was virtually no inflation in the late 1960s either.

And the average rate of inflation in the 1970s was enormous. Current economic conditions are not a good indicator of future conditions. That would have been like saying in March of 2000 "The NASDAQ is so strong right now! What do you mean it will fall? That's silly. There are no signs of weakening.". If Greenspan kept money supply as loose as it was in 2003, we would see serious economic overheating that wouldn't benefit anyone. Good thing you aren't on the FOMC.

Besides, when interest rates are raised, BANKS DO NOT BENEFIT! It reduces the spread between short rates and long rates and thus hurts bank spreads, compressing margins, and shrinking loan demand. If you think banks were doing well in 1999 and 2000 you are sadly mistaken. I have owned a bank stock, Wells Fargo, during the period of Greenspan's tightenings and I can tell you that I have not done so well in the past 7 months while he has tightened. Banks love it when the fed drops short term interest rates to virtually nothing so the spread between short and long is enormous. Banks have never had it so good as they did in 2002 and 2003 when short rates were less than 2% or even 1% and long rates were 4% or 5%.

Clearly you know nothing about banking whatsoever. Under your logic it would be best for banks if the fed raised rates to 10% when in fact it would cause and inverted yield curve and destroy bank profits. Why do you think no sensible investor will buy a bank stock just before the Fed raises rates? I bought mine because I thought he was nearing the end of the cycle within a year and Wells has a good dividend anyway, far better than a bank account at least at 3.4%, so that's why I did it. I didn't buy Wells Fargo because I said, "Oh boy! Greenspan is raising rates! That'll help Wells.". If I did, I should be locked up in a mental institution. Look into the matter before you spout such bullshit.

[David Zephyr]

39. In all fairness, you are really something else.

Ask around the DU sweetie pie, you'll find that I know quite a bit about money. Your gratuitous digs only make you look silly to those that know me.

Using words like "bullshit" on your overheated and hyperbolic keyboard do not make your point better.

You are on "ignore" now with only perhaps as few as four others.

Now be sure to get in your "last word" whatever it may be. I won't respond.

[Zynx]

41. I hope others will look into what you said about bank profits and realize

just how wrong it is. It is the exact opposite of what you said it was and I don't care that I'm on ignore. I know for a fact that I'm right about this. The only thing that pisses me off is that you continue to spew this BS.

[oostevo]

43. Thank you.

Thank you for being so well-informed about this issue, and trying to explain the niceties of monetary policy to others here. You've obviously had a very good education in economic policy, or you are uncommonly good at educating yourself.

I was going to join in this discussion as well, but, judging from the responses you and others received, it seems like it wouldn't have been worth the time wasted arguing. Perhaps some people's biases (whether they be liberal or conservative) are just too deeply ingrained for them to consider other explanations.

(By the way ... I'm not entirely convinced that rate hikes hurt banks to the degree you suggest. Flat yield curves like right now are extremely uncommon, and other financial institutions rely on interest rate arbitrage (the 'carry trade' if you will) much moreso than banks).

[Zynx]

55. Rate hikes at this stage don't hurt so badly that's true.

However, rate hikes up to 6% and 7% would crush regular retail lending margins and if the yield curve became inverted as it did in the early 1980s or late 1990s, then banks are in for a world of hurt. Now, larger banks do have ways of mitigating the damage through many different methods, however the point remains that they would definitely prefer to have an upward sloping yield curve rather than a flat or inverted yield curve.

As for my experience, it is actually mainly things I have picked up on my own, though I do have some education in economics and am currently pursuing a major in economics at Madison. I have been a fairly active investor since 13 and probably have a bizarre number of hours of experience with the stock market. My father has over 22 years of experience in banking and investing and he and I talk about these matters all the time. I would have to say that probably half of what I know was originally taught to me by him.

[ckramer]

46. Do you live with your parents?

[David Zephyr]

76. Your attempt at humor is offensive. My father died recently.

Feel better, now?

I moved out at 17 back in the 1960's. I own lots of real estate in California and a high tech company in its second decade of business where all of my employees have 100% healthcare and no deductions from their paychecks. I have an impressive stock portfolio and have been able to give tens of thousands of dollars to Democratic Party candidates years after years. I know just a "little" about money.

That said, the fact that you and the other poster (whose profile here lists his "interests" as "investing") seem to ignore how higher rates impact the poor, working poor and students is stunning to me.

[Zynx]

81. I'm not ignoring how they impact the poor.

I'm saying they don't help the banks.

[Jamison]

9. NO ONE HERE EVER BELIEVES ME, BUT

the damn Fed is having wet dreams about 1981-82 when we had interest rates around 20%. If you don't think that will ever happen again, you're so wrong. Hey at least when interest rates go sky high like that again, investing what money you have in your local bank in CD's & money market accounts will be quite profitable. Wait for the rates to go higher, then lock in.

[Yavin4]

11. We Won't Have 20% Interest Rates Again

The reason why we had 20% interest rates in 1981-82 was to throw the nation into a recession which would effectively kill off labor unions and the right to collective bargaining. Kill the economy, and soon people will take whatever job is offered to them without making wage and benefit demands.

[Jamison]

12. You don't think Bushco & corporate America wants that?

They'd love to see all Unions crushed & they'd love it if people had to take any job they could so they would only be able to offer $5.15 an hour.

[Yavin4]

44. What Unions?

Other than govt unions, unions are a 20th century relic.

[Media_Lies_Daily]

27. What do you think is happening now, especially with the NeoCon Junta's....

...need for troops to fight their "Forever War" in the Middle East?

Why do you think the American Middle Class is being financially broken?

Why do you think wages are about 40% lower than they were in 1999-2000?

Wake up...American Corporations are trying their best to create a labor force that will be willing to take any job they can get, and there aren't even very many of those. Look at your classified section in employment some time, and tell me what you see now compared to what we were seeing in 1999-2000.

[superconnected]

42. thank you!

The reality of the situation.

[Zynx]

26. They only did 21.5% interest rates to knock the snot out of 12.5%

inflation. I'd be shocked if we even saw a 7% fed funds rate in the next decade.

[termo]

50. maintaining state and personal debts with rates at 20%...

:popcorn:

[swag]

29. Here is the FOMC statement

http://www.federalreserve.gov/boarddocs/press/monetary/2005/20051213/

Release Date: December 13, 2005



For immediate release

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/4 percent.

Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

In a related action, the Board of Governors unanimously approved a 25-basis point increase in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

[swag]

30. One definite upside to the recent rate increases is the availability

of higher interest rates on things like savings accounts. If you don't think this makes a difference to anybody, ask an elderly person on a fixed income whether they prefer their savings account to pay 1% or 4%. The lower (negative, after-inflation) rates have been a tremendous hardship on some of these folks who have been trying to stretch out their limited savings so they can afford to live a little longer. These people have been losing loads of purchasing power in the past few years of negative real interest rates on savings and money-market accounts.

Watch over the next few weeks as on-line FDIC savings accounts at places like ingdirect, emigrantdirect, hsbcdirect, etc. bump their rates up chasing the Fed increase. Other banks will do the same.

Granted, it's far better to be a saver (i.e. lender) than to be a variable-rate debtor in a rising rate environment, and since a lot of American have a lot of debt, rising short rates are going to hurt a lot of people.

But rising short rates will definitely help some people, including a lot of elderly poor on fixed incomes.

[llmart]

32. People will pull their moneyout of the stock market mutual funds...

and buy bank CD's instead.

[Zynx]

38. Rates have to be a few points higher than this to cause that.

The typical stock market total return is 9-10% per year once you factor in dividends. Fed funds rates are still relatively low compared to the late 90s.

[llmart]

49. I don't know anyone personally.......

including myself who has seen 9-10% per year in the last 5 years. I'm ready to pull mine out of mutual funds and buy CD's or something I can depend on. If I were to sit down and try to figure out all the money I've lost since Clinton left office it would make my head spin. And I'm not young enough to think I have many years ahead of me to hope for an administration who can turn this national nightmare around before I retire.

[Zynx]

56. You are aware the past five years have been unusually bad, correct?

Specifically 2000-2002 were the worst years since the Great Depression. One must look at longer term periods than cherry picking the past five years to formulate a hypothesis about stock market returns. Unless you believe we are heading into another Great Depression, the stock market is generally a good place to be so long as you spread your risk in many sectors.

[llmart]

72. Of course I'm aware of that......

I mentioned the "last 5 years" because of this crappy administration. But those of us who are near retirement don't have a lot of time to play around with stocks.

[Lorien]

52. It also considerably "helps" the wealthy for the same reason

what's good for Wall St. is bad for Main st., and all that...

[swag]

53. The stock market typically dislikes rate increases,

and that's why you saw a brief rally yesterday when there were signals that the Fed was going to stop raising rates in the foreseeable future.

[Lorien]

57. I see, no comment on my original point. n/t

[swag]

61. Your original point seems to me to be untrue.

There is no hard and fast inverse relationship.

[Zynx]

59. Yes. Rate increases hurt for a number of reasons:

1. Borrowing costs for corporations go up and compress margins, leading to corporations reducing their capital spending and employment.

2. Bank profit margins are hurt as the spread between short and long rates tends to narrow.

3. Consumer spending is likely to retrench in a rising rate environment thus hurting revenue.

4. For stocks themselves, rising rates make stocks look comparatively less attractive. For instance, if short rates got up to 7%, that would be above the "earnings yield" of stocks(ex: a stock trading at 20x earnings has an earnings yield of 5% and a stock trading at 25x earnings has an earnings yield of 4%) and their dividends combined, thus making stocks look very unattractive.

[swag]

62. Stop it.

With all this "earnings yield" talk, You're making me wistful for the days when the "Fed Model" actually seemed to mean something.

Anyway, nice and well considered post.

[Zynx]

63. I'm only repeating it because that's how many people consider valuations

I personally don't use it to consider my investing decisions largely because interest rates can change so fast.

[swag]

64. I was trying to make a little joke.

I don't think comparing E/P ratios with bond yields is totally groundless. I think there's some value in it, don't you? Obviously, not the end-all, but it provides an additional valuation method.

Best to you. See you around the neighborhood.

[Zynx]

65. There is some merit to it, but it doesn't seem to be that valuable in

terms of predicting stock price performance. I would say if stocks sit at levels at which their earnings yield is far greater than short or even long term interest rates, that would indicate that they are pretty badly undervalued and that would probably mean it would be a good time to buy.