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What The Fed Is Trying To Accomplish at Trader’s Narrative

What The Fed Is Trying To Accomplish

The Federal Reserve made a bold move and lowered rates effectively to zero. Here’s the full statement:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

It took a few years but finally they’ve moved in front of the bond market. As I’ve been saying for more than a year, the Fed allowed the bond market to get way ahead of it and then started to play a game of catch up where they would lower only to see the 90 day Treasury bill rate slip lower still.

zero interest rate treasury bill Dec 2008

To put it bluntly, the Fed is punishing saving and rewarding spending and debt. With inflation running at ~1% anyone who saves money is a chump. Many money market funds now have a negative return (due to MERs).

Anyone who goes in debt to the gills wins. Isn’t that how we got into this mess? you might ask. Well, who said common sense had anything to do with monetary policy.

Believe it or not, the US now has a lower interest rate than Japan. And the lowest rate since records have been kept.

After Japan, the lowest rate is claimed by Switzerland after the Swiss national bank cut their benchmark rate to 0.5% last week. Then Canada at 1.5%. Follow the link to see more global central bank rates.

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8 Responses to “What The Fed Is Trying To Accomplish”  

  1. 1 gamma

    The Fed did not “get in front” of the Treasury markets. The FFR controls short-term rates which have been prices between 0 and .25% for quite some time now. All they did was acknowledge that the market is more powerful than they are in short-term rates.

    However they appear to think they can out muscle the market in pricing assets and pricing longer term interest rates. I think they will find that they are very wrong.

  2. 2 Babak

    gamma, I think they are finally getting in front because not only are they in effect lowering to zero, they are also putting to use all their other tools to ram liquidity down the financial market’s throat.

  3. 3 gamma

    So you think force feeding the market with more debt is the solution??? I guess when the only thing you know is a Keynesian hammer, then everything looks like a nail.

  4. 4 Babak

    gamma, no not really, but that’s what the Fed seems to be bent on accomplishing.

  5. 5 gamma

    well you seem to be contradicting yourself. you said that “they are finally getting in front because not only are they in effect lowering to zero, they are also putting to use all their other tools to ram liquidity down the financial market’s throat”.

    ‘finally getting in front’ sounds like you think they are on the right track lowering rates effecting quantitative easing. But then you say you don’t think the solution is more debt. If you don’t think the solution is more debt than you can’t possible think they are getting on top of the problem…

  6. 6 Babak

    gamma, what I meant is that this is what they should have done more than a year ago. They are finally doing it now but it is too little too late. Of course, there are some massive structural issues related to regulation as well. Am I talking in circles? usually if I talk long enough that happens :)

  7. 7 gamma

    well if you don’t think more debt is the answer then you can’t agree with slashing rates, period. Arguing that it should have been done sooner is just saying you think more debt should have been injected faster.

    More debt is not the answer and this country (and the UK) will spend some very painful years figuring that out.

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