Are interest rates determined by the free market?

[Madison320]

How many of you think interest rates are set by the free market? It seems to me there's quite a few on this website which seems crazy to me.

This is one of Ron Paul's biggest complaints. That the Fed and government are driving rates artificially low:

Ron Paul: Everyone has been misled by low interest rates:

https://www.youtube.com/watch?v=6f8yNkKfM0Q

Just of the top of my head I can think of several ways in which the Fed/Govt drives rates:

1. Fed Funds rate.

2. QE (more than 3.5 trillion)

3. Federally guaranteed mortgages.

4.The fact that almost all the money loaned to the US govt is by the Fed and other governments and central banks.

5. Federally guaranteed student loans.

[Zippyjuan]

There are thousands of interest rates. Which ones are you looking at? As I noted in the other thread, the Fed only sets the rates banks can borrow money overnight. Short term loans are usually following three to five year Treasury notes and long term loans like mortgages usually follow ten or fifteen year Treasuries. The rates on Treasuries are determined by auctions. Rates can follow Fed moves but don't necessarily. I was waiting to refinance my home loan a while ago and was watching the Fed cutting rates at the time but mortgage rates were still moving up.

That the Fed and government are driving rates artificially low

The Fed has been raising-not lowering- their overnight rates since 2015. They have been raising them slowly- one quarter of one percent at a time.




Inflation tracks better but isn't perfect either.

[Madison320]

There are thousands of interest rates. Which ones are you looking at? As I noted in the other thread, the Fed only sets the rates banks can borrow money overnight. Short term loans are usually following three to five year Treasury notes and long term loans like mortgages usually follow ten or fifteen year Treasuries. The rates on Treasuries are determined by auctions. Rates can follow Fed moves but don't necessarily. I was waiting to refinance my home loan a while ago and was watching the Fed cutting rates at the time but mortgage rates were still moving up.

If you bring down one rate, you'll bring down others. If you can borrow from one source at 2% you're probably not going to choose another source at 10%.

If government and the Fed have no influence on rates, why do they do all that stuff I listed originally? Just for laughs?

Also the CPI does not measure rises in stock prices and homes. That's where the QE goes first before it moves to main street. You think it was Obama's and Trump's great economies that drove stock prices thru the roof? Wait until the next recession and people have to sell their shares of Amazon to buy food and pay rent.

[Superfluous Man]

The rates on Treasuries are determined by auctions.

Who is the seller of the item being auctioned, and how did they come to own it in the first place?

[Zippyjuan]

Who is the seller of the item being auctioned, and how did they come to own it in the first place?

The US Treasury is the seller. How things work. The Treasury is notified of how much money the government needs to borrow at a particular point in time. Treasuries are usually in $10,000 face value (what they are worth when they reach maturity). They (the Treasury) decides how they want to break down the maturities- how many one year notes, how many 30 year notes, etc. They then publish a list of how many they want to sell along with their maturities. That goes out to the Primary Dealers- those licensed to participate in Treasury auctions.

https://www.newyorkfed.org/markets/primarydealers

Primary Dealers
Bank of Nova Scotia, New York Agency

BMO Capital Markets Corp.

BNP Paribas Securities Corp.

Barclays Capital Inc.

Cantor Fitzgerald & Co.

Citigroup Global Markets Inc.

Credit Suisse AG, New York Branch

Daiwa Capital Markets America Inc.

Deutsche Bank Securities Inc.

Goldman Sachs & Co. LLC

HSBC Securities (USA) Inc.

Jefferies LLC

J.P. Morgan Securities LLC

Merrill Lynch, Pierce, Fenner & Smith Incorporated

Mizuho Securities USA LLC

Morgan Stanley & Co. LLC

NatWest Markets Securities Inc.

Nomura Securities International, Inc.

RBC Capital Markets, LLC

Societe Generale, New York Branch

TD Securities (USA) LLC

UBS Securities LLC.

Wells Fargo Securities, LLC

Each of these dealers decides how many of which securities they want to buy. They submit that along with the prices they are willing to pay for each one of them. Say 100 15 year notes at $9,000 each by one firm and say 200 five year notes at $9500 by another firm. This is the auction process. They get ranked into a list based on offered price. The Treasury then draws a proverbial line at the point which allows them to sell all the notes they wanted to sell- that becomes the "set price" for that auction. All of the bids above that price get to purchase their shares at that set price- even if they offered to pay more so all the notes in that batch will have the same price and interest rate (the interest rate is calculated by taking the face value, subtracting the selling price and dividing that by the face value- a $10,000 note which was sold for $9,000 has a ten percent rate of interest).

Once they make their purchases, the Primary Dealers can then turn around and sell them to other investors in the open market.

[Superfluous Man]

The US Treasury is the seller. How things work. The Treasury is notified of how much money the government needs to borrow at a particular point in time. Treasuries are usually in $10,000 face value (what they are worth when they reach maturity). They (the Treasury) decides how they want to break down the maturities- how many one year notes, how many 30 year notes, etc. They then publish a list of how many they want to sell along with their maturities. That goes out to the Primary Dealers- those licensed to participate in Treasury auctions.

"Treasury" meaning the department of the federal government. Right?

Why does anybody buy this product? Is there some expectation that the government will pay them back with interest?

If so, what gives these buyers confidence that the government will be able to do that? Is it perhaps because of the government's ability to fund this via taxation?

[Zippyjuan]

"Treasury" meaning the department of the federal government. Right?

Why does anybody buy this product? Is there some expectation that the government will pay them back with interest?

If so, what gives these buyers confidence that the government will be able to do that? Is it perhaps because of the government's ability to fund this via taxation?

Yes, the US Treasury is part of the Federal Government. They are not backed by anything but yes, it is the government ability to tax which gives them security. And since they have never been defaulted on (so far), they are considered one of the safest investments one can make. That is what makes them so popular. In exchange for that security, they also usually offer a lower rate of return than other investments.

[Swordsmyth]

Since it is always impossible for government to force its will on reality there is always an element of market influence but in our current system it is very small.

[Madison320]

Since it is always impossible for government to force its will on reality there is always an element of market influence but in our current system it is very small.

I agree and I was going to add that at some point the government won't be able to control rates. Probably when prices start rising too fast.

[Krugminator2]

The Fed controls overnight rates and can influence longer term rates through QE. The Federal Reserve controls interest rates over the long run but not in the way you think.

There is always this talk about artificially low interest rates. That would mean you believe there is a natural market rate of interest at any given time. Perfect. If rates are held artficially low, you will get overconsumption of debt, inflation and an overheating economy. Long term rates would go up because of future inflation expectations. We might now just be to that stage.

But rates weren't artificially low for most of the last ten years. The Federal Reserve wasn't holding rates down. They were low because growth was slow and inflation was low which would lend credence to the idea that rates were artificially high for a large part of that time. Had the Federal Reserve made rates negative in 2008 and 2009, the economy likely would have gotten into expansion far quicker.

If you are a free marketeer you believe in supply and demand and market clearing prices. Price floors prevent markets from clearing. Zero percent acted as a price floor just like minimum wages acted as a price floor and prevent labor markets from clearing.

Extremely low rates are indicative of tight monetary policy not loose monetary. High rates are indicative of loose monetary policy. It is counterintuitive but clearly correct. Rates went much higher under Jimmy Carter but inflation kept going up. Rates stayed near zero after the financial crisis but there was no inflation.

[Madison320]

There is always this talk about artificially low interest rates. That would mean you believe there is a natural market rate of interest at any given time. Perfect.

Of course I do. Just like any other price in the free market. Don't you?

If rates are held artficially low, you will get overconsumption of debt, inflation and an overheating economy. Long term rates would go up because of future inflation expectations. We might now just be to that stage.

Rates have been been suppressed since 2008 and I don't see how that's even debatable. Remember it's not just the Fed funds rate that was set to 0%. It was QE and guaranteed loans and demand for loans from other govts and central banks. And we've had an explosion of debt and asset prices. Do you think it was a booming economy that sent the DOW from 7K to 25K?

But rates weren't artificially low for most of the last ten years. The Federal Reserve wasn't holding rates down. They were low because growth was slow and inflation was low which would lend credence to the idea that rates were artificially high for a large part of that time. Had the Federal Reserve made rates negative in 2008 and 2009, the economy likely would have gotten into expansion far quicker.

You think rates were artificially high at times between 2008 and now? The Fed Funds rate of 0%, guaranteed loans, QE, demand for treasuries from foreign govts and central banks were pushing rates UP!

It doesn't bother me so much that you believe this, but it's highly disturbing to me you seem to be in the majority on a Ron Paul website. We're all Keynesians now I guess.

[Krugminator2]

Do you think it was a booming economy that sent the DOW from 7K to 25K?

No. But pushing long term rates down through QE purchases did make stocks relatively more attractive. Also stocks are valued by discounting future cash flows. Low interest rates increase valuations.

Rates have been been suppressed since 2008 and I don't see how that's even debatable

You are right. It isn't debatable. Rates were artificially high and that is true beyond a reasonable doubt. All you need is supply and demand graph to realize this.

And I noticed answer to this riddle.

Extremely low rates are indicative of tight monetary policy not loose monetary. High rates are indicative of loose monetary policy. It is counterintuitive but clearly correct. Rates went much higher under Jimmy Carter but inflation kept going up. Rates stayed near zero after the financial crisis but there was no inflation.

It doesn't bother me so much that you believe this, but it's highly disturbing to me you seem to be in the majority on a Ron Paul website. We're all Keynesians now I guess.

1. I certainly like Ron Paul but he has been wrong about everything the last ten years on this topic. He isn't an economist. I care more about truth than what an OB/Gyn says about what the dollar should do.

2. There is nothing Keynesian about what I said. I could just as easily say we are all socialists now for the refusal to believe in supply and demand and market clearing prices.

As far as this,

The Fed Funds rate of 0%, guaranteed loans, QE, demand for treasuries from foreign govts and central banks were pushing rates UP!

I'll just repost what I said.

If you are a free marketeer you believe in supply and demand and market clearing prices. Price floors prevent markets from clearing. Zero percent acted as a price floor just like minimum wages acted as a price floor and prevent labor markets from clearing.

Here is a smart person's take, an actual economist who has been right about everything. http://macromarketmusings.blogspot.c...marketers.html

As a free-market loving individual, it pains me to see so many of my fellow travelers claim the Fed has artificially suppressed interest rates since the onset of the crisis.....

What I wish George Will, Bill Gross, and other free market advocates would consider is the possibility that the Fed itself is not the source of the low rates, but simply is a follower of where market forces have pushed interest rates. That is, the Great Recession and the prolonged slump that followed caused interest rates to be depressed and the Fed did its best to keep short-term interest rates near this low market-clearing level.

But there is more to this story. The crisis was so severe that the market-clearing level of short-term interest rates was pulled down well below 0%. That is a natural consequence of the sharp collapse in business and household spending. The Fed, however, cannot push short-term nominal interest rates very far past 0% because people would start hoarding cash rather than earn negative interest. So instead it was forced to keep short-term interest rates near the zero lower bound (ZLB) while the actual market clearing interest rate level slowly worked its way back up toward zero as the economy healed.

The irony of this is that the free marketers of the world, like George Will and Bill Gross, should be sympathetic to this story. They believe in the power of prices to clear markets so they should be open to the possibility that sometimes--in severe crises like the Great Depression or Great Recessions--interest rates may need to go negative in order to clear output markets. If so, it is incorrect for them to ascribe the low interest rates to Fed policy since it was simply chasing after a falling market-clearing interest rate level.

[Madison320]

You are right. It isn't debatable. Rates were artificially high and that is true beyond a reasonable doubt. All you need is supply and demand graph to realize this.

Why would anyone loan money at a negative rate of interest?

[Krugminator2]

Why would anyone loan money at a negative rate of interest?

Banks would still lend money at a positive rate. Overnight rates were near zero but mortgage rates were still 3% or so.

Most people would prefer to put money in a bank at a small negative rate as opposed to having big sacks of cash at their homes. And the negative rates would encourage people to invest as opposed to putting money in the bank which would be the whole point of negative interest rates.

[Krugminator2]

http://www.themoneyillusion.com/mone...nterest-rates/

I’m also happy to announce a new Mercatus working paper by Jeffrey Hummel, on a topic that’s dear to my heart—the myth of central bank control over interest rates.

Before discussing this idea, I need to reassure readers that both Jeffrey and I acknowledge that on any given day the Fed is able to raise or lower the fed funds rate, through suitable adjustments in monetary policy. But that true fact leads many non-economists, and unfortunately even many economists, to wildly excessive views on the extent to which the Fed “controls” interest rates. The deeper mistake is to confuse the path of interest rates over time with “monetary policy”. Here is the abstract to Jeffrey’s paper:

"Many believe that central banks, such as the Federal Reserve (Fed), have almost total control over some critical interest rates. Serious monetary economists are more sophisticated. They realize that central bank control over interest rates is very far from complete. Nonetheless, central bank officials and many economists are largely responsible for the popular misapprehension. This is because they persistently and misleadingly describe central bank policy as if it determined interest rates. Their focus on interest rates as both the target and indicator of monetary policy stems from the fact that even those holding the sophisticated view of how monetary policy works tend to overestimate the strength and significance of a central bank’s limited effect on real interest rates. There is no denying that central banks have some impacts on interest rates, in both the short run and the long run. However, this working paper argues that not only is the popular belief in precise central bank management of interest rates simply wrong, but also even the sophisticated view of central bankers and mainstream monetary economists turns out to be overstated. In fact, continued targeting of interest rates by central banks has even led to some confusion and policy errors."

[oyarde]

I would dump it into land , gold & guns before I accepted a negative rate .

[idiom]

For the past decade there has been an unholy amount of bad debt floating about. To know if inflation was high or low you would have to know how much of that there was.

I don't think even the central banks have any idea what anybody is holding, jsut that its big and bad, and keeping it together is doing really weird things to the economy globally.

As a lot of this debt has been rolled over at progressively lower and lower interest rates it becomes near impossible for interest rates to move higher without blowing up a lot of debt that becomes rapidly unserviceable at higher rates.

Nothing has gone boom yet, no hyper inflation... so perhaps the giant sucking sound of deflationary bad investments is a lot worse than we presume?

[Madison320]

For the past decade there has been an unholy amount of bad debt floating about. To know if inflation was high or low you would have to know how much of that there was.

I don't think even the central banks have any idea what anybody is holding, jsut that its big and bad, and keeping it together is doing really weird things to the economy globally.

As a lot of this debt has been rolled over at progressively lower and lower interest rates it becomes near impossible for interest rates to move higher without blowing up a lot of debt that becomes rapidly unserviceable at higher rates.

Nothing has gone boom yet, no hyper inflation... so perhaps the giant sucking sound of deflationary bad investments is a lot worse than we presume?

I agree and the cost of servicing the debt is one of the main reasons the govt/fed is trying to hold down rates.

[osan]

How many of you think interest rates are set by the free market?

The markets are not free, therefore NO.

[Madison320]

The markets are not free, therefore NO.

Do you think rates are artificially high or low? Up until now I didn't think "artificially high" was even an option.

[osan]

Do you think rates are artificially high or low? Up until now I didn't think "artificially high" was even an option.

I'd call a negative real interest rate "artificially low", yes.

[Madison320]

I'd call a negative real interest rate "artificially low", yes.

Exactly!

I was starting to think I was crazy. This all seems very obvious to me but when you're the only one saying it you start to worry.

[osan]

Exactly!

I was starting to think I was crazy. This all seems very obvious to me but when you're the only one saying it you start to worry.

Oh, you're plenty crazy. Just not for those reasons.

[Krugminator2]

Up until now I didn't think "artificially high" was even an option.

You would think you would be more open minded then. I think I first heard this argument in like 2011 when I realized Peter Schiff was a gold salesman with a terrible track record of money management and not economist or trader.

https://www.alt-m.org/2016/12/01/fed...nterest-rates/ Has the Fed been Holding Down Interest Rates?

The unvarnished truth, I hope to persuade you, is that interest rates have been low since the last months of 2008, not because the Fed has deliberately kept them so, but in large part owing to its misguided attempt, back in 2008, to keep them from falling in the first place.

Let's see why kind of Keynesian socialist we have here. Hmmm.... George Selgin... *Uses Google*

George Selgin
Professor

Influenced by: Friedrich Hayek
Fields: Macroeconomics, Monetary economics "Selgin's principal research areas are monetary and banking theory, monetary history, and macroeconomics. " " He is one of the founders, along with Kevin Dowd and Lawrence H. White, of the Modern Free Banking School,^[3] which draws its inspiration from the writings of Friedrich Hayek on denationalization of money and choice in currency"

[Madison320]

You would think you would be more open minded then. I think I first heard this argument in like 2011 when I realized Peter Schiff was a gold salesman with a terrible track record of money management and not economist or trader.

https://www.alt-m.org/2016/12/01/fed...nterest-rates/ Has the Fed been Holding Down Interest Rates?




Let's see why kind of Keynesian socialist we have here. Hmmm.... George Selgin... *Uses Google*

George Selgin
Professor

Influenced by: Friedrich Hayek
Fields: Macroeconomics, Monetary economics "Selgin's principal research areas are monetary and banking theory, monetary history, and macroeconomics. " " He is one of the founders, along with Kevin Dowd and Lawrence H. White, of the Modern Free Banking School,^[3] which draws its inspiration from the writings of Friedrich Hayek on denationalization of money and choice in currency"

I don't care who a google search links him to. His theory makes no sense at all.

There's some good responses to this topic over in the political forum where I started a new thread. I think the best one is "How could adding 3 trillion in reserves RAISE the rate of interest?"

[Zippyjuan]

I don't care who a google search links him to. His theory makes no sense at all.

There's some good responses to this topic over in the political forum where I started a new thread. I think the best one is "How could adding 3 trillion in reserves RAISE the rate of interest?"

Supply and demand. If the money is in reserves, it is not circulating and not increasing the supply of money and driving its price (interest rates) down. It has to move out of reserves and into the economy to have any effect.

[Madison320]

You would think you would be more open minded then. I think I first heard this argument in like 2011 when I realized Peter Schiff was a gold salesman with a terrible track record of money management and not economist or trader.

He started his investment business in the 1990s. He didn't start selling gold into 2010 and a year later you call him a "gold salesman" as if that's all he does?

Question for you. Suppose John sells only chocolate, but Bob sells chocolate and oranges. John tells you that chocolate is healthy and oranges are unhealthy. Bob tells you that chocolate is unhealthy and oranges are healthy.

Who are you more likely to believe?

[Brian4Liberty]

1 year, 10 year, 30 year... what’s the treasury yield curve?

Is the lack of QE and possible boycotting of US Debt by China driving rates up?

[idiom]

The US Treasury provides what the market considers the zero risk interest rate. They are bought and sold on the free market, so the price of risk free assets is known. The interest rate actually provided by the government is essentially the lowest bid. Why would you buy debt with a lower return and higher risk?

If the government has to raise returns to sell debt, then everyone else has to sell at rate above that, or at a serious discount. The government doesn't force this, the market does.

So the overnight rate and the treasury rate are two very different mechanisms.

Treasuries are not inflationary and do ot affect the money supply if the debt is being extinguished. this has not been the pattern in the US for some time.

People confuse government debt with debt based money, they are separate systems. The government could run quite happily without incurring debt while having a separate debt based money system.

[Madison320]

The US Treasury provides what the market considers the zero risk interest rate. They are bought and sold on the free market, so the price of risk free assets is known. The interest rate actually provided by the government is essentially the lowest bid. Why would you buy debt with a lower return and higher risk?

I agree with most of what you wrote, but is the treasury market a really free market when 90+% of the buyers are governments and central banks.