Ask the expert: Will quantitative easing affect money market rates?
November 04, 2010
Q: There seems to be a lot of news about the Federal Reserve buying US Treasury bonds to push interest rates lower. Does this mean my money market rates are going to go down even further?
A: On November 3, the Federal Reserve announced an aggressive program to pump $600 billion into the U.S. financial system by buying Treasury bonds. The strategy is known in economic circles as "quantitative easing," and in plain terms it is a strategy which targets interest rates with the aim of driving them lower.
Despite that intention, it is not clear whether the strategy will impact money market rates, or the rates on savings accounts and other deposits. That's good news for beleaguered depositors, who have already seen their interest rates driven to near zero.
The Fed is able to exercise a fair amount of direct control over very short-term interest rates, but the rates that control most real-world loan terms are influenced by longer-term interest rates, such as bond yields. Buying bonds sends their yields lower, and the hope is that loan rates will follow.
Since money market rates and other deposit rates are more function of short rather than long-term rates, and since short-term rates are already about as low as they can go, it's doubtful that the Fed's action will have any immediate impact on deposit accounts. However, unless quantitative easing is a rousing success, driving down longer-term rates could further delay the day when deposit rates eventually return to normal.
There is certainly no guarantee that the Fed's strategy will work. Interest rates are already very low -- even for longer-term rates, as evidenced by record lows on mortgage rates this year -- but the real problem is that loan demand just isn't there.
In short, the Fed's latest move shouldn't hurt short-term rates any further. However, it doesn't seem likely to help the economy either.
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