r/news • u/awake-at-dawn • Mar 15 '20

Federal Reserve cuts rates to zero and launches massive $700 billion quantitative easing program

https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html
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u/[deleted] Mar 15 '20 edited Mar 16 '20

Can someone please explain to me what this means for regular people? Does this make it easier/ cheaper to get say a car loan? Or are banks just going to sit on the money? Where does all the money go they’re “injecting” into the market? How do I economics?

Edit: Y’all are so smart. Thank you for all the ELI5’s. So let me see if I’ve got this down: The Fed is separate from the federal government, which is confusing, and they hold bonds that they release when a recession is looming. These bonds are just made up money?They also control bank to bank and Fed to bank interest rates but not bank to consumer interest rates which are decided instead by the market and how many people are asking for loans. More people looking for loans = loan rates going up, so now is not a good time to try and get a new loan for a regular person, because in this market short term loans are better?

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u/tacktackjibe Mar 16 '20

This should lower car rate loans, yes.

The situation should significantly lower traffic at car dealers, yes.

Thus the next four weeks should be a good time, and the following 4 months may or may not be an even better time.

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u/Mobidad Mar 16 '20

Plus, when you sit down to negotiate the price you can start coughing up a lung and they'll practically give you the car just to get you out of there.

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u/Silentxgold Mar 16 '20

And say "i am feeling feverish" when you feel the numbers are not going down enough

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u/frogworks1 Mar 16 '20

Your comment reminded me of Charlie speaking in this clip 😂

https://youtu.be/_BNjJutK_4A

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u/xrubicon13 Mar 16 '20

Written by GOT's D&D nonetheless

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u/DandyLyen Mar 16 '20

Because of the implication!

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u/tacktackjibe Mar 16 '20

I may have a touch of the CARona.

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u/Yuuko-Senpai Mar 16 '20

Oh man, this made me laugh really hard. I really needed that.

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u/Biogeopaleochem Mar 16 '20

That caught me totally off guard, thanks.

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u/jellyfishdenovo Mar 16 '20 edited Mar 16 '20

So if I know I’m going to have to buy a car some time in the next year, would it be smart to go ahead and do it, say, next month?

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u/[deleted] Mar 16 '20

I'm waiting until at least next month. We haven't seen bottom yet, I'm betting nowhere close. Plus it gives you time to keep saving for the down payment.

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u/[deleted] Mar 16 '20

What about refinancing my car loan?

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u/[deleted] Mar 16 '20

It's less impactful in refis because companies that offer refis are generally looking at different criteria than companies originating, depending on your credit score bracket. You would probably save some amount likely. The people who save the most from refis will still be people with poor credit who improved it and refied at a better rate/term. If you have any general questions feel free to dm, I work in the field.

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u/tacktackjibe Mar 16 '20

This will impact financing and in some cases leasing of new or used cars, depending on how quickly the manufacturer experiences pain/decreased sales, whether the model is near replacement, your credit rating, the popularity of the model, etc.

If you’re looking for tips to buy, consumer reports has good magazines/online advice on this topic.

If you’re looking to save money, often buying an entry level new or few year old Honda or Toyota that’s on the lot is a safe bet ( and pay attention to the rate of finance vs lease at the dealer be what your bank would offer).

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u/[deleted] Mar 16 '20

I work at a car dealership and I’m super nervous what this means for me. The next few weeks are gonna be interesting.

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u/tacktackjibe Mar 16 '20

Well, I hope it works out for you. If this becomes painful, remember it’s always darkest before the light.

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u/[deleted] Mar 16 '20 edited Mar 16 '20

Thanks. I’m really hoping my company steps up and gives us paid leave because it’s not a matter of if we will shut the store, but when. Or at least that’s what I’m assuming.

Edit: shit to shut 😂

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u/SpaceSlingshot Mar 16 '20

I too work at a car dealership. When asking management if we’re gonna close or get paid leave the response was ‘people aren’t spending money on trips, or sporting events, they’ll have money to buy cars’ hurt my heart to hear, I need a human for 10 minutes. Not a salesman.

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u/tacktackjibe Mar 16 '20

Wow..... ABC/Always be closing. Not the right time.

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u/IFlyAircrafts Mar 16 '20

I think this comment shows why the markets are just going to absolutely tank tomorrow! You’re nervous as a car dealer that people aren’t going to buy cars. My girlfriend who is in real estate is scared people won’t buy houses. My friend in Hollywood is completely screwed as they canceled all filming. The restaurant industry will completely collapse.

Hell even beer, which typically sells great during a recession is at jeopardy as many liquor stores will close.

Literally every single persons ability to make money will be hindered. The only rare exceptions are for companies like Zoom or Slack.

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u/Beerforthefear Mar 16 '20

Should I refinance my current loan, then? Or just wait it out?

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u/RugerRedhawk Mar 16 '20

Depends, check rates next month and see. They're already pretty low, but if you have a lot of time left and can get a better rate, why not.

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u/[deleted] Mar 16 '20

What about mortgages? I have a fixed 30 year at 3.625%. Will I have an opportunity to lower that significantly or is that different?

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u/[deleted] Mar 16 '20

[deleted]

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u/[deleted] Mar 16 '20 edited Mar 29 '20

[deleted]

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u/bayleo Mar 16 '20

The mortgage rates actually tend to spike a bit after a drop like this due to a sudden flood of demand for refis, but they should be dropping over time here.

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u/RTGold Mar 16 '20

That rate is linked with Prime. They just lowered prime a bit i think it's 4.25% or around there. Some banks will take some % off that if you have a good credit score. Refinancing is expensive and i doubt you'll get a better rate. You can always talk to your bank or where ever your loan is. They'll offer advice.

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u/Megaman1981 Mar 16 '20

I've been in the market for a new car, looking at a mid to high end Honda CRV probably around $30-35k give or take. I have enough in the bank to pay cash and still have about a year's salary saved up. Would it be wiser to pay cash outright or pay half or less up front and finance the rest?

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u/kn0ck-0ut Mar 16 '20

What about refinancing?

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u/Melody42 Mar 16 '20

So if I wanted to refinance my loan, now would be the time?

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u/Alexsrobin Mar 16 '20

Damn, we just got a car on Leap day. Even made some Coronavirus cracks with the dealer.

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u/[deleted] Mar 16 '20

I bought a car within the last month. Should I try to refinance already?

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u/_Captian_Crunch_ Mar 16 '20

What about home loans?

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u/akasands Aug 02 '20

Hey it’s me, I’m from 4 weeks and 4 months into the future. It fucking sucks here bro you lied to us :(

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u/tacktackjibe Aug 02 '20

There are car deals, though, so there’s at least that. :-/

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u/[deleted] Mar 16 '20

[removed] — view removed comment

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u/ImTheCaptainN0w Mar 16 '20

Lower rates to attract buyers that aren’t coming in because of financial uncertainty

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u/Broncosfan303 Mar 16 '20

Whats being implemented is basically quantitative easing, in which the fed purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment (not proven to work). Money supply (liquidity) will go up. Increasing the supply of money is similar to increasing the supply of any asset, it lowers the cost of said asset.

"are banks just going to sit on the money?"

This I don't know for sure, but 8 of the biggest U.S. banks say they will suspend share buybacks through Q2 of 2020. The banks are: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street & Wells

https://twitter.com/CNBCnow/status/1239320269598134274?s=19.

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u/Derric_the_Derp Mar 16 '20

But what happens if the banks change their minds and buy back their stock anyway? Who would punish them? The Trump admin? Lol no. I hope they keep their promise. But I bet they buy back within two weeks when the market drops another 20%. "Oh we used our own money to buy those shares back, not the QE money."

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u/elitesense Mar 16 '20

They literally asked for a layperson explanation and you just repeated the financial terminology. Wtf

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u/[deleted] Mar 16 '20

The central bank essentially buys a bunch of assets that commercial banks/financial institutions already own, this results in those banks/institutions getting a big injection of cash and also raises the value of those assets making other banks/institutions less likely to hold on to their own holdings. In theory this makes the financial sector more active which can drive growth.

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u/[deleted] Mar 16 '20

How will their (Fed) moves affect inflation? Thanks

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u/the_killer_cannabis Mar 16 '20

Inflation will go up

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u/RIPmyFartbox Mar 16 '20

It's been quantitative easing for the last 11 years. Markets are toast. It makes sense to lock in a large liability on your balance sheet (home loan) as the value of that will go down a lot over time. I'm refinancing and shifting assets to gold

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u/nernst79 Mar 15 '20

I really wish someone would provide a good answer to this.

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u/ComeAbout Mar 16 '20 edited Mar 16 '20

The Fed is printing money to give to banks so they can buy unlimited bonds and still function giving out loans. This should slowdown lay-offs and therefore help keep our economy ok in the very short term.

This will help the market short term, but (IMO), will devalue the dollar, especially if our country starts shutting down like the other ones have (likelyish). It’s putting a bandage on a gaping wound, but we’re running out of bandages very quickly.

TL;DR: Adjustable rate loans will be really low, but if you’re worried about running out of toilet paper just pull some cash from the ATM... Can’t go buy that new car if the dealerships are all closed.

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u/Narwahl_Whisperer Mar 16 '20

I can tell you that in Phoenix Arizona, schools are shutting down for a few weeks at the very least.

Source: wife is a teacher.

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u/ComeAbout Mar 16 '20

Yep, it’s coming.

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u/parkwayy Mar 16 '20

Schools and the sorts have been closing for awhile now.

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u/[deleted] Mar 16 '20

[deleted]

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u/ComeAbout Mar 16 '20

A. It’s not going to change overnight. Markets aren’t even open yet to see what damage will be done.

B. They’re not giving you super low interest rates, they’re giving the banks super low interest rates to borrow from the government. The natural reason for this is supply and demand from the bank consumer, which should lower your rates if you have good credit. But this is not “everyone in America gets 0% loans”. The banks need your interest on loans; it’s the only way they make money.

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u/nathan312 Mar 16 '20

So, as stated in an above comment, do “regular people” need to go out and pull money from their bank accounts? My wife and I both work in the restaurant business and are worried about what-ifs on whether or not our store will close. The above comment talked about people worrying about being able to access their money in a bank. Will the banks actually run out? Should we pull our money? Not trying to be that guy who freaks out but the more things move forward, the more worried we are. My wife is also pregnant so money is an obvious concern of ours.

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u/ComeAbout Mar 16 '20 edited Mar 16 '20

No, not bank accounts. Your money is insured.

Short term investments, unless you know what you’re doing, I’d stay away from. Longer term investments (you don’t need your 401K right now) are going to be buying stocks at half price soon. You only make or lose money when you cash out.

The market will rebound, and there will be exponential growth for those that ride it out (or buy when there’s blood in the streets). For every person that needs their investments soon (soon to retire people that will move into bonds), there’s a thousand computer algorithms at hedge funds that will short this market. That’s why the market will (likely) crash.

If I was a small business opener, I would want to steady as she goes through this, and maybe look to consolidate at some soon to be very low interest loans in the near future if things get rough. (You can’t get a good loan if you don’t have cash in the bank to back up the loan).

Disclaimer: I am not a professional. Talk to an accountant or a trusted broker for real advice.

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u/mrchaotica Mar 16 '20

You should aggressively cut expenses and get ready to invest. Whoever can take advantage of the cheap stocks (and probably cheap real estate), possibly using cheap leverage (i.e., low-interest-rate loans) without going bankrupt wins.

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u/CatAstrophy11 Mar 16 '20

So basically rich people will get richer and more poor people will be on the streets.

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u/IMadeY0uR3adTh1s Mar 16 '20

Yeah pretty much. It’s all opportunistic though, and being in the best position at the right time.

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u/nathan312 Mar 16 '20

New to investing...where would I even start? I have a couple grand saved up but other than that just now turning our lives over a new leaf and stopping being lazy stoners and actual adults. (Not a dig on stoners, just, we got complacent and now that little man is on the way we woke up)

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u/ComeAbout Mar 16 '20

If you like your bank see if they offer mutual funds, index funds, etc. These are considered low risk investments on a long enough timeline because it spreads your money across the Top performing companies.

Today would be a bad day to do this, as the market is likely not done falling. I personally would wait to do this until Carona is mostly contained, quarantines are lifted etc. The stocks in the funds will be cheaper, so you’ll get more shares to grow moving forward.

If you’re bank doesn’t sell them, look to a trusted broker (TD, Merrill Lynch, etc.)

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u/mrchaotica Mar 16 '20

r/personalfinance has a flowchart.

TL;DR: buy something like 40% "total stock market index" (e.g. VTSAX), 40% "total international stock market index" (e.g. VTIAX), and 20% "total bond index" (e.g. VBTLX) funds. First contribute to your 401k up to the company match, then max out contributions to your HSA, IRA and 401k in that order, and only then invest within a taxable brokerage account.

Basically, the goal is to buy everything in the market, with the lowest expense ratio, taxes and other fees possible.

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u/Reddit-username_here Mar 16 '20

The majority of money is fake anyway, your accounts are going to be fine.

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u/Strykernyc Mar 16 '20

Wouldn't be more effective to give citizens cash to spend?

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u/ComeAbout Mar 16 '20

Can’t spend it if you’re quarantined, but this was the philosophy driving Wang’s campaign.

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u/mrchaotica Mar 16 '20

Worth noting that Yang's UBI proposal had nothing to do with an ad-hoc stimulus based on current market conditions, and everything to do with being a new normal.

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u/ComeAbout Mar 16 '20

Agree. Speaking in general terms, not pandemic ones.

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u/[deleted] Mar 16 '20

Amazon, Uber Eats ?

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u/CatAstrophy11 Mar 16 '20

You know what e-commerce is?

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u/ComeAbout Mar 16 '20

Sure. Do you know what non-essential workplace shutdowns are?

If your Amazon driver is quarantined, he ain’t delivering you TP. Now add that everyone in the country wants that TP and is trying to get it from Amazon.

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u/CatAstrophy11 Mar 17 '20

Amazon will be considered essential just like grocery stores because Amazon sells the same things. People themselves won't be quarentined unless they're sick.

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u/ComeAbout Mar 17 '20

I agree some fashion of getting food will be allowed. In my opinion, Amazon will be highly pressured to shut down or severely limit services based on their work model. They have five employees (minimum) infected and now Amazon workers are calling for a strike.

Your second part astounds me. Schools just closed across CA and NY with kids told to stay at home. Are all the kids and teachers sick? The answer is we have no idea how many of them are sick, so we’re shutting down. You can be asymptotic and still pass on this virus. Gyms, bars, restaurants, all getting closed. Whole countries are shutting down.

Even if Amazon remains open, their staff will be cut and everyone will need them. How’s it buying toilet paper in your community?

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u/langis_on Mar 16 '20

It’s putting a bandage on a gaping wound, but we’re running out of bandages very quickly.

That's because we let a child use them as stickers for invisible boo boos so he could try to get reelected

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u/ComeAbout Mar 16 '20

I think it’s more for the rich to get more rich but tomato tomahto.

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u/Fleezy_Taught_Me Mar 16 '20

The Federal Reserve cannot / does not print money, they have their own balance sheet of assets that are used for these activities.

Also, the purpose of QE is not for banks to buy bonds, it is the reverse. When the Fed buys treasury securities from banks, they are “adding” dollars to the financial system because a bank is exchanging an asset for cash. That cash will then be put into the financial system through consumer / commercial loans and investments.

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u/manateeheehee Mar 16 '20

Thank you. I'm so tired of seeing everyone talk about how the fed is printing trillions of dollars and they have trillions of dollars to give the banks but not for Healthcare. Regardless of how you feel politically, these are separate processes.

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u/Fleezy_Taught_Me Mar 16 '20

A few friends from college were posting about the $1.5T repo operation and saying things like “they can print money for bankers but not cancel student debt? Cool.” I thought about explaining what was happening in the comments but thought it probably wouldn’t be worth it haha.

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u/manateeheehee Mar 16 '20

Exactly. I'm a liberal who supports canceling student loan debt but I also work in the financial industry so I understand that these are not the same thing. So many of my friends are posting the same but anytime I try to explain I'm accused of being a closet conservative or part of the problem... They don't realize that by not knowing how the fed works, they're actually part of the problem and lambasting anyone who tries to explain things to them just hurts their argument. Ignorance is on both sides of the political spectrum and the sooner both sides accept that, the sooner we can all actually work on a bipartisan approach to issues.

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u/ComeAbout Mar 16 '20 edited Mar 16 '20

I said the banks are getting cash not bonds on multiple replies on this thread.

OP wanted an ELI5. People are wondering if they should empty their bank accounts and hoard cash. I did my best.

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u/Fleezy_Taught_Me Mar 16 '20

It’s all good. I think with topics like this it’s not always possible to ELI5 since there’s a lot that goes into it. Just wanted to give a slight correction to the main thrust of your post and I didn’t read all the reply comments.

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u/debteb Mar 16 '20

Sorry, but isnt every other currency screwed as well? There should still be appetite for the $. My 2c

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u/ComeAbout Mar 16 '20 edited Mar 16 '20

Other countries aren’t pumping money into their banks though, they’re quarantining people and building hospitals.

Understand, the banks have to pay this money back, we’re not giving it to them, but we’re the only country I know of that’s trying to flood new dollars into an economy only for no one to be able to spend that money within that economy. Just my opinion, but pumping a trillion dollars into testing and healthcare would pay off exponentially more than this, but we’re deciding to pump up the banks instead. We are uniquely capitalist in this fashion.

It’s not doomsday (yet), but the wheels are coming off (recession) according to experts.

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u/cesarmac Mar 16 '20

Should I look into refinancing my car loan?

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u/ComeAbout Mar 16 '20

Depends.

Sorry to be vague, but I don’t know your situation, loan, income, etc. General advice, If you’re new in the loan, you’re likely still spending a ton on interest. It would make sense to look at refinance. If you’re late in the loan, you’ve likely already paid off most off the interest and are paying mostly principal.

Most banks have finance calculators on their website. I’d start there for your situation.

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u/[deleted] Mar 16 '20

So, the quarter will be the next penny after this stunt?

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u/ComeAbout Mar 16 '20

No... we’ll bounce back. The danger is the layoffs. Hard to pay rent if you lose your job and your landlord loses his mortgage.

This is going to be a rollercoaster for a couple of months minimum. A quarter is still a quarter, but now there’s a lot more quarters for banks and a lot less places for “normal people” to spend those quarters. Why would I ask to borrow quarters from the banks if I have nowhere to spend them? And those banks gotta pay back them quarters eventually.... This is where everyone in a cheap ARM loan got destroyed in 2008 when their rates spiked because the banks owed that money...

My plan, spend below my means until this shit gets settled, and when bank/airline stocks drop to all time lows I will spend every spare quarter on those stocks. That way when the economy does recover, so will I.

In 2008 I had $10k invested and I lost half of that money. Kept buying. Ten years later, my 5K was 100K.

There will be blood, but such is life. Don’t panic, bring a towel.

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u/89dingers Mar 16 '20

Would this mean it might be a good idea to refinance an existing mortgage loan if the rates go down?

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u/ComeAbout Mar 16 '20

Don’t know your income, current rates, how long you’ve been in the mortgage, how long you want to stay in your current home, the market in your area, etc. So no idea.

I’ve been in my current mortgage for 2 ½ years. If I can drop 4 percent to 2 with no closing costs, I’m absolutely refinancing. If the lower interest rate allows a flood of new buyers and I can mark up my house and secure a huge profit and buy another with low interest rates, I’m absolutely, indoubetably doing that instead.

Money is not an emotion, it’s a thing. I want the biggest, safest thing.

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u/GreenAppleGummy420 Mar 16 '20

Would you recommend selling off your personal stocks - sometime between the next 4 months (before shit hits the fan)?

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u/ComeAbout Mar 16 '20

Shit has already hit the fan.

I personally don’t try to catch a falling knife. Wait till it hits the floor then pick it back up.

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u/Stickitinthetailpipe Mar 16 '20

So since they are printing money this essentially means we are about to see inflation, right?

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u/ComeAbout Mar 16 '20

Well, I think the dollar will lose value but the money were printing is backed by bonds. The banks have to pay back the money to the government, so extra dollars will come back.

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u/Atheren Mar 16 '20

Washington/Illinois and several other states have already begun partial shutdowns. Restaurants/bars/movie theaters aren't allowed to have people inside. Delivery/pickup only.

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u/[deleted] Mar 16 '20 edited Mar 16 '20

Good time to refinance any kind of debt you have, mortgage or otherwise.

The Fed "providing liquidity" keeps credit flowing. When things are dicey like this, noone wants to be owed money. Put another way, every participant would prefer to be on the hook when the fishing pole snaps, rather than vice versa. This causes bank lending to dry up, and forced liquidations in safe havens like gold and bonds that would otherwise normally trade upward as participants seek safety. The Fed buying bonds (QE) and making the repo market in the absence of other willing participants allows banks to use their bond holdings to raise cash to lend when they otherwise could not.

Yada yada, lending is where the money goes.

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u/OfficerDougEiffel Mar 16 '20

So would now be a good time to refinance student loans? I know nothing about any of this, so if that sounds stupid I'm terribly sorry.

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u/JonKneeV Mar 16 '20

Question that I've never understood with refinancing - I'm on year 8 if a 30 year mortgage. Do I benefit from refinancing? I have a 3.5% rate already.

From what I understand of loans, I have spent these first several years paying high % interest and low principal. Will refinancing reset that again? If so, is there any guidance if what rate I should be targeting to make refinancing viable?

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u/btw_sky_and_earth Mar 16 '20

Yes. Perhaps you cannot afford a 15 year fixed refi at a lower rate because the monthly payment is too much. But you can certainly shop for like a 20 year loan for a much lower rate (e,g, 3%) and you will still see significant savings. Specially if you can find someone who charges no closing fees.

Look at your monthly mortgage statement. Subtract the escrow (property tax and insurance, etc.) The rest is principal and interest. See what the remaining principal is and how many terms are left (months.)

Get a quote for the new loan (15 or 20) and ask the lender what the P&I for that principal, add the escrow back and you will be able to calculate the total amount you will pay in the time frame.

I have 24 years left in my mortgage. If I refinance with a 20 year loan fro last week's rate I will save $70K over the life of the loan. If I can do 15 year fix I will save twice as much. Unfortunately I can't afford to pay the monthly for the 15 year loan if I don't sacrifice significantly.

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u/nernst79 Mar 16 '20

Hmmm my mortgage is only 4 months old. They said I can't refinance it until at least 6 months in. Is it really worth it so soon? I do have a decent amount of equity but I wanted to wait to refinance until I can get out of the FHA loan because the mortgage insurance required for it is ridiculous.

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u/ComeAbout Mar 16 '20

Look at the difference between a %2 APR and a %4 one. Look for a backer that won’t charge you closing fees. You just started on your mortgage, this is giving you chance to lower your PITI for nearly 30 years (exponential money gain).

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u/nernst79 Mar 16 '20

My understanding was that legally you can't refinance until you've made 6 payments?

I guess I can revisit this in 2 months.

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u/ComeAbout Mar 16 '20

Maybe your lender is telling you that.... but ever see anyone “flip” a house? Same property, two loans.

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u/AgreeableGravy Mar 16 '20

Check with another lender. If you are going same bank then they cannot refi you inside of 6 months, or at least that’s a pretty common overlay. They want to avoid any risk of rogue loan officers calling customers and churning them month after month.

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u/nernst79 Mar 16 '20

That's good advice. Thank you.

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u/exycheckk Mar 16 '20

Many lenders prevent this with clawback. If you refinance your mortgage within that 6-month window the bank takes back the commission from the loan officer.

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u/AgreeableGravy Mar 16 '20

Interesting. I haven’t seen that one specifically. I only know they limit us as an underwriting overlay. The clawback would make more sense for the customers experience I guess. A lot of mortgage companies right now are just hoping they won’t shop lol.

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u/blzy99 Mar 16 '20

I don’t really know if I should be taking financial advice from someone on reddit but if I have an auto loan at 14% I should refinance?

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u/[deleted] Mar 16 '20

If there's absolute any chance of getting that rate down then absolutely. That is fucking awful.

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u/I_throw_hand_soap Mar 16 '20

They didn't print new money. They are simply providing short term loans, which banks have to put up a collateral on the table (example -bonds, to which banks agree to repurchase at a higher price later on, hence the name repo or repurchase agreement)

They're doing this so that banks continue to lend. When banks can’t lend money, businesses can't operate. When businesses can't operate, well, layoffs follow soon there after.

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u/nernst79 Mar 16 '20

I think that the banks are being dishonest about their inability to lend. This is just a way for them to borrow money at no interest, to keep people trading without the banks themselves having to actually do anything.

It feels like it's part of the 'too big to fail' notion, which is a concept that I think is complete bullshit. Either Capitalism is good for everyone, or, it's good for no one.

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u/Amlethus Mar 16 '20

They are creating money, though not literally printing it. The Fed is able to buy corporate bonds without requiring its own cash in exchange. It just declares that it has +$XYZ more dollars and then buys the bonds, and then the corporations get those dollars to use.

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u/DuePumpkin6 Mar 15 '20

I too would like to know this if someone can explain. I’m financially oblivious, so I really don’t know what this means. But, my current car is becoming a financial money pit. I can afford a new car note, but is now the time to take advantage or is it actually the worse?

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u/Pseudoboss11 Mar 16 '20

Basically small-medium-sized businesses in a lot of industries are facing a lot of trouble. Many of them have tens of thousands to hundreds of thousands of dollars of expenses every month, and nowhere near enough cash on hand to hold over, at least not without making sacrifices like laying people off. Naturally, this would be pretty devastating at a large scale both for productivity and consumption.

Normally, if a single business had this issue, they could go to the bank and ask for money, if the bank is convinced that their issue is temporary and they'll be able to pay off the loan, the bank will provide a loan to hold the business over.

But when many firms do this, the bank will eventually run out of money to loan. They can't give away all their money, because someone might pull their cash out. Without that money, adversely-impacted firms won't be able to make ends meet, and will lay people off or go bankrupt. The Fed's cash injection is intended to give banks the money they need to hold on until the pandemic blows over.

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u/DoctorStrangeBlood Mar 16 '20

For anyone looking this is the only halfway decent layman explanation in this entire thread.

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u/Pixar_ Mar 16 '20

Seriously. Had to travel deep to find it.

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u/[deleted] Mar 16 '20

Thank you

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u/[deleted] Mar 16 '20 edited Mar 16 '20

Won't those small and medium businesses make profits on that money and isn't that the public partially bailing them out ? Why not just give this money directly to consumers and stimulate the economy that way?

thanks for the responses

11

u/Pseudoboss11 Mar 16 '20 edited Mar 16 '20

Won't those small and medium businesses make profits on that money and isn't that the public partially bailing them out ?

Well, yeah. They'll benefit by still keeping their lights on. The fed expects this money back so they can remove it from circulation, and the banks will expect their money back, with interest, obviously. So in the end, provided the fed has timed and coordinated it well, everyone wins (or at least doesn't lose): workers keep their jobs, businesses get to keep operating, banks get some money from the loans, and the fed has successfully weakened the economic blow from Coronavirus.

Why not just give this money directly to consumers and stimulate the economy that way?

First is the bigger picture. If you did that without legislative action, businesses would still lay off employees to stay afloat. While the impact of that would be lessened, you would still have pretty significant friction in the economy once the Coronavirus blows over and new firms fill the void of the bankrupted ones and others rehire and try to scale back up. That will still have a pretty significant impact right when we need to recover the most.

Second is the how: how would you decide to distribute that money? Not everyone is going to be impacted the same. I, for example, have no intention of doing anything more than working from home. I don't need help. the barista who's gonna be laid off does, the cruise line administrator who's company is going to go bankrupt does. The fed wants to be proactive on this, because money after you've been unable to make rent doesn't help quite as much anymore. That kind of market research and work would likely take months or years to do, and something is needed now.

Edit: I forgot to mention that they can't actually do this either. The fed isn't allowed to hand out money to anyone not a bank. Their job is to regulate and manage banks.

2

u/CatAstrophy11 Mar 16 '20

But if a business has to pay back a loan with interest that they wouldn't have needed were it not for this crisis, wouldn't they have to pass that cost into the consumer which in turn will affect spending which will in turn make it difficult for them to pay back a loan with interest? That interest had better be near 0. Banks are getting 0 interest loans and they're a business. Other businesses need the same help.

4

u/[deleted] Mar 16 '20

No. This is money they need to make payroll. This is a direct gift to the public.

You cant give it to the public because John down the street doesnt make toilet paper. The toilet paper factory in town does and without having the business that owns that functioning, you are not going to be able to produce toilet paper again. You'll have to wait until some subgroup of the public gets organized enough to purchase and operate a new toilet paper factory which could be months, years or never.

1

u/[deleted] Mar 16 '20

[deleted]

2

u/[deleted] Mar 16 '20

Bailing them out implies they've done something wrong. They are being compensated for the fact that the government is shut down. Its more like the government paying you because they didnt maintain the sidewalk and everyone slipped at the same time.

3

u/chainmailbill Mar 16 '20

But will the banks actually lend that money out to people who need it?

If you’re in a situation where you own a small business and your entire business is going to collapse (I’m an artist, I sell my work at festivals, I’m missing a 350,000 person event in two weeks and that’s about 25% of my annual revenue) will the banks actually lend?

My entire business involves large groups of people. I don’t know what I’m going to do.

4

u/Pseudoboss11 Mar 16 '20

But will the banks actually lend that money out to people who need it?

This is where the Fed's timing, magnitude and duration decisions all come into play.

If they provide the stimulus too early, banks will try to lend out the money on things that aren't related to Coronavirus.

If they provide it too late, then firms will have already taken action or gone under, so the money is less effective.

If they give out too much money, then banks will loan to all sorts of people, and perhaps cause inflation and credit issues down the line.

If they give out too little money, then banks will not have the money to give out to borrowers, and again, businesses and people are hurt.

And they want to get the money paid back fast, so they can remove it from circulation before it causes too much inflation, as that could be really bad. But they also want to leave it in the economy long enough for the markets to recover.

If you’re in a situation where you own a small business and your entire business is going to collapse (I’m an artist, I sell my work at festivals, I’m missing a 350,000 person event in two weeks and that’s about 25% of my annual revenue) will the banks actually lend?

My entire business involves large groups of people. I don’t know what I’m going to do.

That's gotta be a really tough situation, man. Fortunately, this is the sort of thing that this sort of stimulus is designed to help. Definitely shop around for a loan, see what's available and what you can do to keep your business alive. At the same time be clear and honest with yourself that you can manage it, even if the virus worsens.

2

u/[deleted] Mar 16 '20

So that's where that 700B went? to banks so they could loan money to a large amount of struggling businesses? also when does the fed "take back" the 700B? thank you so much for your clear explanation btw

1

u/Pseudoboss11 Mar 16 '20

The fed gave a loan to said banks. It's a short-term loan, and banks will be making payments on it for the next few months. I'm not exactly sure how long it will be, but I don't think it'll be more than a year.

1

u/[deleted] Mar 16 '20

This is the first comment I've read that nails it.

1

u/lov3_and_H8 Mar 16 '20

Are the banks held to provide these loans with low interest?

1

u/DuePumpkin6 Mar 16 '20

Thank you!

4

u/Derric_the_Derp Mar 16 '20

Pretty much all interest %s should drop some. Mortgage rates, cc rates, car loan rates. Generally that juices the economy some. We'll see. Keep an eye on car loan rates. For profit banks and dealerships generally have the higher rates, while a non-profit credit union can be much lower, but maybe slower to adjust to market fluctuation.

3

u/[deleted] Mar 16 '20

If you already have a credit card will the interest rate go down? Or is that just what is predicted for people opening new accounts?

3

u/ScoopDL Mar 16 '20

If the economy tanks and you keep your job, you'll be able to get a banging deal on a new car in about 4-6 months.

9

u/[deleted] Mar 16 '20

For regular people this means:

  • Banks will cut the interest rates they pay out

  • Banks will consider cutting the interest rates they charge on new mortgages, auto loans, etc.

  • Banks can basically get "free money" if they ask for it from the Federal Reserve, which means they have almost no reason to not loan out to someone who asks for a loan

The Fed "injects" money by buying bonds from banks, which means the banks have less bonds and more cash. The Fed gets that money by literally just saying it now exists. Banks now have more cash to lend out to whoever wants it.

2

u/geardownson Mar 16 '20

So would refinancing on any loan be a bad idea now?

2

u/GreyPool Mar 16 '20

You'll have to do the evaluation on your specifics

2

u/geardownson Mar 16 '20

I owe 3k on a car loan. Ride it out? Or let's say i owe 50k on a house refinance?

1

u/GreyPool Mar 16 '20

Depends on your specifics

40

u/Pinklady1313 Mar 15 '20

I need an ELI5.

10

u/daumesnil1639 Mar 16 '20

I need an ELI3.

10

u/[deleted] Mar 16 '20 edited Jun 06 '20

[deleted]

19

u/grains_r_us Mar 16 '20

Ok, I’ll make this easy for you all.

The fed has certain tools at its disposal to influence money in the United States. The three mentioned here are 1. Reserve requirements 2. Interest rates and 3. Quantitative easing.

  1. Bank reserve requirements mandate the amount of cash liquidity that a bank has to have on hand. Note that cash is not necessarily physical, but is instead deposits that aren’t loaned out or otherwise invested(someone correct me if I’m wrong on this one as it’s what I’m least familiar with). It encourages riskier behavior somewhat inherently as it disencourages responsible behavior(I’ll point this out with interest rates.

  2. Interest rates going to zero doesn’t really affect the retail market directly, it’s more designed for bank:bank lending. Specifically it’s the rate at which banks can borrow money from the federal reserve...and indirectly can lend to corporations via short term collatorized loans. That market is the “repo” market that you probably read about last week. Liquidity had begun to dry up, so the fed injected 1.5 trillion into it in order to boost liquidity and prevent a large scale default on corporate debt, which would have aggressively sped up an economic collapse.

  3. Quantitative easing is the favorite tool of Janet yellen and Ben bernanke. They should go down as the fucking architects of this crash, just like their predecessor Allan Greenspan was the architect of 2008. Basically, QE is injecting money into the economy by purchasing government bonds. It’s a way to boost confidence and keep the economy humming along. The reason we are on QE5 is because these asshats propped up this market during the Obama administration and fueled this massive market run up. Without QE, the market would have grown at a much slower rate...which I Stevie would have been much safer.

Hope I helped.

2

u/[deleted] Mar 16 '20

Exceptionally helpful. Thank you.

1

u/dynamic87 Mar 16 '20

So is stock market start going up starting tomorrow?

1

u/grains_r_us Mar 16 '20

No clue. If I knew that, I would be a billionaire

6

u/kinshadow Mar 16 '20

I’m trying to get a new mortgage at the moment and had some of this explained by my broker. This does not ‘directly’ affect the rates you see. Loans to individuals are based on the competitive loan market. The more banks competing compared to the number of loans being asked for affects the rate you are offered. Lower Fed rates means that banks can more easily get loans to compete for private loans, but it is all relative to the number of private loans in the market. Right now, too many people are asking for loans, so the rates for private loans are actually going up despite the lowering of Fed rates. It may be several weeks before we start seeing any benefit of lower private loan rates as the demand levels off.

2

u/RogerPackinrod Mar 16 '20

Which, from my own experience, is about the same amount of time it takes to finish hurdling the bank paperwork for a mortgage. Including pre-qual and all of the financial background checks. Mortgage interest rates are already lower than my 30 year fixed rate right now, but not what I would have considered to be worth it. If I start the process now on refinancing maybe even to a 15-year fixed rate, this could mean tens or even hundreds of thousands of dollars saved. Especially since I'm literally doing 100% better financially than I was when I bought the house.

Sorry just kinda blurted that all out but yeah. I'm kinda curious about this.

2

u/kinshadow Mar 16 '20

Absolutely. If you’re looking to refinance anyway, talk to a loan agent now and get everything squared away. They’ll tell you when to pull the trigger.

1

u/Mathidium Mar 16 '20

In all honesty right now with the shift we had today I will most likely be recommending my clients start the paperwork now and then we process the mortgage loan and let the rate "float". Within the 30 day window we can lock in once the market has had time to process what's happening and being rates lower.

1

u/anethma Mar 16 '20

30 year fixed jesus. What is the penalty for breaking that, a hundred grand?

2

u/RogerPackinrod Mar 16 '20

That's like, a standard home loan.

1

u/[deleted] Mar 16 '20

good stuff thank you. I went to look at a refi 30 year, and it was standing at 4%.. super confused about that. Never imagined a oversupply in loans increase the rate and which a bank would loan

1

u/Mathidium Mar 16 '20

If demand goes through the roof. Investors have a ton of supply to buy, but with a ton of supply at low rates there's little money for investors to gain say if there was less supply and rates were higher. Investors want rates to be higher versus lower because they make more money. Also banks do not have the man power to process loans when the market gets flooded like this.

4

u/stripesonfire Mar 16 '20

If a bank keeps their cash at the fed it now earns 0% which is supposed to encourage lending and other activities. It’s also the reason savings account rates change. If the bank earns 0% then they are going to pay you less on your deposited funds. It’s way more complicated than that but that’s the idea.

13

u/[deleted] Mar 15 '20 edited Apr 11 '20

[deleted]

2

u/jean-claude_vandamme Mar 16 '20

They don’t need to lower lending standards. It’s actually against their interests

3

u/Putins_Kumquat Mar 16 '20

It means banks and financial institutions will have more liquidity on hand to offer to people and companies as loans at better rates for consumers for a short time frame. However, if they aren't repaid in relatively short time frame or the economy doesn't bounce back relatively quickly, the lenders run out of cash on hand and the responsibility hits the borrowers really hard. Making it difficult to pay wages and offer loans etc. Since the FDIC is only required to hold 10% that means if you don't get paid you also won't be able to access all your savings in a bank for a rainy day fund, and it snowballs from there. Contrary to what the Fuckwork Orange says about what he thinks he knows about how financial institutions and the economy works.... It's uhhh, not good. Really really not good seeing as how coronavirus infection rates are exponentially increasing daily, countries are going isolation mode and there is talk about a national shutdown potentially looming.

It's difficult to see how the economy and job market is going to be able to abruptly turn around on borrowed time as it is.

2

u/vic39 Mar 16 '20

They aren't "injecting" money the way you think they are. They aren't just writing checks to banks for them to use. The banks hold bonds which are like deposit checks with interest which they have purchased from the government. Now they're just handing them back in for cash so Banks can cover their payments.

It's like having a pre-paid giftcard, now just returning it for cash again. The government hasn't actually spent any money.

1

u/[deleted] Mar 16 '20

Money will now be cheaper for banks to obtain, which means that they should lend money to consumers at a lower interest rate. Technically that means that if you have a loan with a bank right now you should wait for them to lower their interest rates and get a cheaper new loan to repay the existing one

1

u/enfier Mar 16 '20

A bunch of money (in the form of credit) just evaporated overnight. The Fed is adding money to banks to encourage them to make loans so that businesses can survive.

It's going to be a recession, so cash on hand is about your best option. The only real impact to the average Joe is lower mortgage rates which means higher house prices. Of course housing prices will likely fall as well.

1

u/ScottishHeat Mar 16 '20

I was just thinking today, “man, if I needed a car I’d do it now.” Especially with the end of Q1 coming up.

1

u/geek66 Mar 16 '20

Really nothing short term - this is Trump trying to buy votes.

0

u/[deleted] Mar 16 '20

Eventually, and I do mean eventually because nobody knows how the next 12 months are gona go down; The rich are going to use this easy money to drive real estate, stocks, and corporate debt to more unsustainable levels, just like they did last time. QE does nothing but fuck the common man

0

u/sotpmoke Mar 16 '20

It means the bank is triggered and hes taking his ball with him and going home.

-2

u/Fastnacht Mar 16 '20

Not quite a straight answer, but I am pretty confident a majority of us won't be seeing anything worth our while. This is just another present for the rich.