2. You changed the amount of principal in your example. A company that goes under due to an expected 0.25% bump in short term interest rates was in extremely poor financial health to begin with.
2. I was under the impression that VC firms typically raise money from a pool of investors and they take a cut of the % return to those investors. How likely is it that VCs are financing a substantial (if any) portion of their investments through short term loans subject to the short term interest rate?
3. The minimum possible FFR adjustment is 25bp (historical, not a hard rule but a custom)
4. Fed does not adjust monetary policy to suit specific sectors of the economy
5. Fed has committed to getting to 2.0% core inflation by 2018 [1] and would not have risked credibility loss by raising rates if it did not intend to continue to hike (and hike fast)
[1] http://www.federalreserve.gov/monetarypolicy/fomcprojtabl201...
Maybe some of these companies need to start making money and before they are valued at a billion dollars.
Rents from L.A. San Francisco, Denver, Chicago, New York, are climbing at double digit rates year over year. The overwhelming majority aren't getting the kinds of salaries and wage increases to afford such increases.
The Fed had only been saying rates need to go up for 2 years before they actually did it, but did the market price this in? Not entirely, a good chunk of the market was in denial about the inevitable.
As others noted it wouldn't double your payments as tech doesn't have access to overnight rates with zero spread.
Well, I disagree with your comment on policy, but yes, anybody that was on the edge is pretty toasted right now. The important question is whether VCs were there.
If you're looking at medium-term financing options -- on the scale of multi-year business loans, mortgage fixed rate periods, and the like -- in most of the Western world, you should probably be considering whether you can afford at least 2.5% interest rate rises over the next few years, not just 0.25%.
I happen to think it was a good decision. But why does everyone insist on calling this change "small"?
My point is, this attrition turned up to be incredibly small, and still irrelevant at the US later interest levels.
Maybe I'm missing something really obvious here, but in what practical sense is that true?
But why does everyone insist on calling this change "small"?
Because by law or convention 25 basis points is the smallest increase in base interest rate that most national banks will ever make, and since this change was telegraphed long ago it's literally the minimum anyone working with serious finance was expecting.
That's not how interest rate setting works at all. Plus, the Fed is still using a banded window that encapsulates your five basis point rise.
What company is borrowing at Fed Funds rates? If - theoretically, because we have to be quite theoretical to operate under your assumptions - a company was that exposed to interest rates and had zero hedge against interest rate vol they would not have the credit to hope to get funding anywhere near Fed Funds rates.
If you're surviving at the edge of loans (i.e - you're in a potential distressed scenario) you'll have bonds trading at a significant discount. This is exactly what began to happen during the early part of 2015, when Fed Fund futures had little chance of the Fed moving priced in.
'''"The short-term volatility is not something that worries me for monetary policy; it reflects market participants trying to make sense of global developments," Williams told reporters on Friday, adding that he sees no signs of distress or a weak economy in declining asset values, and is unsurprised that stock prices .SPX would decline as the Fed raises rates.'''
That's a pretty clear signal that the Fed have knowingly and openly popped a bubble. This is going to be painful.
If your balance sheet is such that the incredibly marginal increase in borrowing costs is anything other than a bump, than you are a dead man walking anyway.
This wasn't a marginal increase. It was a very dramatic tightening. Marginal would be going from 2.5% to 2.75% or 3% .. this was doubling.
And they did not telegraph anything. If you tracked the CME fed funds probability you'd see that it waffled up until a couple of months beforehand and we were at 0.25 for a very long time.
The reason 0.25 used to work as a min step was because a) we were never at such low rates for so long before and b) things didn't have a chance to settle into a particular rate structure so it wasn't really an issue. The difference this time was everyone started building businesses based on 0.25 and had time to do so.
Agreed, you shouldn't be doing that. But heck, the economy is pretty messed up so the rules have changed.
Of course, one tends to hear these stories after it is too late. No doubt plenty of people ignore the warnings and get by just fine, right up until they don't. And then it's someone else's fault.
[1] http://www.wsj.com/articles/fed-chief-janet-yellen-rate-incr...
Living on the edge is always a risk, and those who do should be prepared for the risks associated with it.
Then its time for those industries to restructure (and, if they must, fail).
TBH, the fed should not have gone from 0.25 to 0.5 That was really really dumb. They should have gone from 0.25 to 0.3 or something.
My guess if the bleeding keeps up, the Fed will have to do a rate cut. Should help things.
Since I got downvoted, let me show the math:
For an entity borrowing at fed funds rate, on 100B loan that is 250M to 500M annual payment after the hike. If it were 2.5% to 2.75% on 10B, that would be 250M to 275M. See the difference? Even a 50bp hike would just be 20% higher payments.
If you're surviving at the edge of these loans, then doubling your payments could easily wipe you out.