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Fed May Be Planning Ways To Force Rates Lower For A Longer Period

Thursday, July 8, 2010 - 7:32 PM
In future FOMC meetings the Fed may finally change its line "exceptionally low levels of the federal funds rate for an extended period." However, it may actually get worse for us savers. They may change it to something like "exceptionally low levels of the federal funds rate for at least the next year".

This Calculated Risk Blog post has a good review of this and other possibilities based on recent reports from the Washington Post and the New York Times.

Why the potential change? According to the Washington Post:
Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth.

BTW, the next FOMC meeting is scheduled for August 10th.
2
Ken TuminKen Tumin5,469 posts since
Nov 29, 2009
Rep Points: 125,052
1. Friday, July 9, 2010 - 5:54 PM
If the Fed were "to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years),"  I have questions Id like some insight into:

1.  Would that decision/announcement in any way influence/deflate mortgage loan rates?  If it would, wouldn't that idea just force deflation by coaxing would be borrowers to wait until rates hit bottom (whatever that could be)?  As it is, there were references to articles, on this blog, indicating that if it could be, the Fed Funds rate would already be around NEGATIVE 5%.  Is it possible for such a decision to snowball deflation?  Or are loan rates unrelated to this issue?

2.  Is the Fed truly able to HOLD the rate at the level it chooses?  Would the "World Markets" ever have the power to "force" the rate higher, due to implied/perceived risk of a similiar sovereign nature as the Euro-zone?  Is it possible for the outside market to turn rates "on a dime" forcing the type of inflation the "gold-bugs" prepare for?

3.  What would the further implication be for all bank savings rates?  Would the rates be driven down further?  Is there a gain to the fed to zero out savers interest?  The interest is taxed...  no interest... no tax.

 The one gain I can see for extended, predictable low rates, is that since Treasuries are the Gov't "mortgage," the lower the rate, the more it can "borrow" and/or the easier it will be to pay it back.  I just wonder if the fed truly has as much control here, as it often implies. 

If you can help me understand this better, I'd appreciate your feedback.  Thanks, Mike
3
MikeMike327 posts since
Feb 22, 2010
Rep Points: 876
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