Driving interest rates into the ground: take two
October 27, 2010
The Federal Reserve is expected to announce another program of Treasury bond purchases, as part of their continuing effort to drive interest rates into the ground.
Of course, Fed officials would characterize this as "quantitative easing to stimulate the economy." If the prospect of the U.S. government buying its own bonds -- effectively, borrowing money from itself -- doesn't impress you, then you won't be surprised to note that the strategy hasn't worked so far. The financial markets, however, seem to have high expectations for the approach.
Market expectations exceed economic impact
The bond market and stock market both seem to fully expect the Fed to go through with another round of bond purchases. Lower interest rates are considered positive for both bonds and stocks, which would help explain the strong performance of both markets this year.
Of course, those high expectations may be part of the problem. Some say the Fed has painted itself into a corner, raising an expectation of more interest rate intervention that it dare not disappoint. On the other hand, continuing to raise those expectations may be creating asset bubbles in stocks and especially bonds which could be painful when they burst.
Savings accounts continue to suffer
Notably, none of the euphoria in the financial markets seems to have translated into the actual economy. It has been apparent for some time that the Fed is fighting the wrong battle -- striving to lower interest rates when loan demand just isn't there.
Meanwhile, the Fed's policies are holding back Americans with healthy balance sheets. People with bank savings are seeing rates on savings accounts languish at 0.18 percent, while money market rates average just 0.25 percent, and CD rates range between 0.15 percent at the short end and 1.63 percent for five-year CDs.
Sure, you could do a little better by shopping for the best CD rates, etc., but overall the point is this: low interest rates are taking money out of the economy. It seems the economy could use that extra income right about now.
