I am not fully convinced by the regression analysis. In my opinion one month is too short of a time period to gauge the causality between the two. Furthermore, if you believe that market efficiency to some degree exists, then the reason there is such a strong causality of T-Bills on Fed Funds rate is because market adjust preliminarily using foresight of what the Fed WILL do, not vice versa. This is especially the case given the Fed's use of forward guidance and explains the lack of movement one month after the Fed actually raises rates
I will comment if you dont mind! They bought everything just to keep the market propped up. Capitalism is really died at 2008. When you bail out dozens of companies what should have been bankrupt...and so on. You know my point.
When the Fed raises rates it directly impacts the prime rate, that in turn raises rates on consumer credit (i.e. home equity lines of credit, credit card rates, etc.) and that can affect consumer spending. In a consumer spending economy that means less purchases and that affects corp revenue.
Thank you Prof. I hear you about the long term interest rate and the power of the fed to determine it (if any). But why do the big names from Blackrock; GS, JPM talk about interest rate and fed as if the fed has a lot more control. Is it because they are more concerned about the t-bond and how it affects their business? or is the fed more of a consensus builder for the industry on the direction of real growth and inflation? I just don't get the power that they attribute to the fed.
Thank you Aswath, but I'm not sure that your experiment of T-bills rates vs. the fed funds rate reveals what you believe it tells. The fact that fed funds rate move after the T-bills probabely derived from the fact that the markets already anticipate the fed's decisions. therefore the rates are going higher before, but are completely related to fed decisions (that's ofcourse not the same with long term rates)
Dr. Damodaran. Firstly, thank you for sharing all your knowledge. I do have a question regarding the increased inflation scenario. When you say "Increase in inflation will lead to a higher ERP". What would you be your reasoning? I know that Nominal risk-free is a function of expected inflation + real risk free rate and ERP = Risk on the market (RM) - Nominal Risk-Free rate (RF) As inflation increases, I understand RM should also increase. Does it mean expected inflation will remain the same or decrease? This would be the only reasoning I could think of, supporting your statement. Because, if we increase RM and expected inflation by the same amount, we should have the same ERP. Thank you
Respectfully - - T-bill rates would follow moral suasion from the fed. The fed is telling the markets which way the rates are going and then the market is slowly betting in-between the news and the event. You should be able to find evidence that between raise cycles that there should be a movement down in T-Bill rates if the fed doesn't raise as expected.
Sir thanks for sharing the same. Slide no. 4 fed impact is there any special reason for bucketing the periods in that way ? Further, 0.75 fed impact in a regime of 3.5 , isn't it substantial in deciding direction of the interest rate ? sir out of this topic, just want to check what is ultimate objective of fed while setting fed funds rate ? In india , the central banks policy framework mandates to keep the inflation in a 2-6 percent zone irrespective of growth, employment, foreign exchange movement., other macro factors like crude oil rise (these factors to be taken care by govt ). Further when you value a company, the general inflation impacts differently to different class of companies e.g. Real estate companies will have higher earnings during the time of inflation whereas the Pharma companies will be impacted negatively. Banking and investment stocks have huge mark to market gains or looses at the time of change in interest rates. Sir also read for your interestarchive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm one last question in the scenario on s&p 500 valuation you had taken earnings growth by 7% , whereas in the best case scenario nominal gdp will grow by 6% (2% inflation plus 4% real growth) when earnings grow by 7% against Gdp growth of 6% , what is the net earnings margin you are looking at as it might in long run turn out to be a fallacy that New York has more lawyers than citizens .
Professor, when you mention your idea on Tbill to be around 3.5, are you talking short term 2 year or 10 year? Also, it would be great if you can comment on yield curve with negative slope. Thanks
I am not fully convinced by the regression analysis. In my opinion one month is too short of a time period to gauge the causality between the two. Furthermore, if you believe that market efficiency to some degree exists, then the reason there is such a strong causality of T-Bills on Fed Funds rate is because market adjust preliminarily using foresight of what the Fed WILL do, not vice versa. This is especially the case given the Fed's use of forward guidance and explains the lack of movement one month after the Fed actually raises rates
I still can’t believe these valuable insights are here for free
Professor it would be wonderful if you could comment on the current Balance Sheet of the Federal Reserve (and their asset purchase plans). Thank You!
I will comment if you dont mind! They bought everything just to keep the market propped up. Capitalism is really died at 2008. When you bail out dozens of companies what should have been bankrupt...and so on. You know my point.
Thankyou professor I really appreciate your time and effort
sending you thanks from Chicago for opening up your lecture hall to the world, Professor D!
When the Fed raises rates it directly impacts the prime rate, that in turn raises rates on consumer credit (i.e. home equity lines of credit, credit card rates, etc.) and that can affect consumer spending. In a consumer spending economy that means less purchases and that affects corp revenue.
brian colla ...and corporate debt...and government debt, etc. Any change would cause exponential results.
Thank you Prof. I hear you about the long term interest rate and the power of the fed to determine it (if any). But why do the big names from Blackrock; GS, JPM talk about interest rate and fed as if the fed has a lot more control. Is it because they are more concerned about the t-bond and how it affects their business? or is the fed more of a consensus builder for the industry on the direction of real growth and inflation? I just don't get the power that they attribute to the fed.
What about the role of forward guidance
This should be on everyone's subscriber list THANK YOU FOR THIS. And I appreciate you providing the spreahshets so that we can work backwards
Thank you Aswath, but I'm not sure that your experiment of T-bills rates vs. the fed funds rate reveals what you believe it tells. The fact that fed funds rate move after the T-bills probabely derived from the fact that the markets already anticipate the fed's decisions. therefore the rates are going higher before, but are completely related to fed decisions (that's ofcourse not the same with long term rates)
Dr. Damodaran. Firstly, thank you for sharing all your knowledge. I do have a question regarding the increased inflation scenario.
When you say "Increase in inflation will lead to a higher ERP". What would you be your reasoning? I know that Nominal risk-free is a function of expected inflation + real risk free rate and ERP = Risk on the market (RM) - Nominal Risk-Free rate (RF)
As inflation increases, I understand RM should also increase. Does it mean expected inflation will remain the same or decrease? This would be the only reasoning I could think of, supporting your statement.
Because, if we increase RM and expected inflation by the same amount, we should have the same ERP.
Thank you
Another great video, thank you
Great video! Thanks for the free lessons you are providing with your UA-cam channel :)
Respectfully - - T-bill rates would follow moral suasion from the fed. The fed is telling the markets which way the rates are going and then the market is slowly betting in-between the news and the event. You should be able to find evidence that between raise cycles that there should be a movement down in T-Bill rates if the fed doesn't raise as expected.
11:00 "Inflation returns" .....and it really did.
This is just so damm invaluable. I can't believe this exists.
thank you professor as always!
Sir thanks for sharing the same. Slide no. 4 fed impact is there any special reason for bucketing the periods in that way ? Further, 0.75 fed impact in a regime of 3.5 , isn't it substantial in deciding direction of the interest rate ? sir out of this topic, just want to check what is ultimate objective of fed while setting fed funds rate ? In india , the central banks policy framework mandates to keep the inflation in a 2-6 percent zone irrespective of growth, employment, foreign exchange movement., other macro factors like crude oil rise (these factors to be taken care by govt ). Further when you value a company, the general inflation impacts differently to different class of companies e.g. Real estate companies will have higher earnings during the time of inflation whereas the Pharma companies will be impacted negatively. Banking and investment stocks have huge mark to market gains or looses at the time of change in interest rates. Sir also read for your interestarchive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm one last question in the scenario on s&p 500 valuation you had taken earnings growth by 7% , whereas in the best case scenario nominal gdp will grow by 6% (2% inflation plus 4% real growth) when earnings grow by 7% against Gdp growth of 6% , what is the net earnings margin you are looking at as it might in long run turn out to be a fallacy that New York has more lawyers than citizens .
What about the impact of forward guidance?
Professor, when you mention your idea on Tbill to be around 3.5, are you talking short term 2 year or 10 year? Also, it would be great if you can comment on yield curve with negative slope. Thanks
really nice analysis
Really awesome video
🙏🏽
I think, with collecting some historical data you just intend to bring all in your status, = confused!
Well, the fed will be reactive and not proactive!