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Nearly Out Of Tricks, Fed May Pare Longer Rates

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http://www.nytimes.com/2011/09/03/business/economy/almost-out-of-tricks-fed-may-train-sights-on-longer-term-rates.html?_r=1&ref=business

Cheaper credit could give the economy a boost — and prompt more hiring — by encouraging more borrowing, so companies and consumers have more money to spend. But with interest rates already low, it isn’t certain how much this might help the economy, though proponents of more action by the Fed argue that this is better than not trying.

The central bank has already undertaken a spate of unprecedented measures to reinvigorate growth, including two large rounds of asset purchases. At its August meeting, many Fed policy makers expressed interest in engaging in further easing measures, but could not agree what to do.

......

Buying more longer-term Treasuries increases the demand for longer-term issues. And as their prices rise, the interest rates on those securities fall, as do many other interest rates across the economy that are pegged to the Treasury rate.

In addition to stimulating the economy with cheaper credit, lower long-term interest rates could encourage investment in riskier assets, like stocks. After all, if 10-year Treasuries don’t offer much in the way of returns, investors will seek higher returns elsewhere. If investors do start buying up riskier assets, those asset prices rise. Consumers then see that their portfolios are worth more, causing them to feel richer and so more comfortable with spending. This is known as the wealth effect.

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Other options that Fed might consider include lowering the interest rate it pays banks on excess reserves to encourage them to lend more, but many economists doubt that this would have substantial effects on growth. A more aggressive option would be to raise its medium-term target for inflation.

If prices are expected to rise, banks, businesses and consumers will be more eager to spend their money before it loses value. That could have positive effects throughout the economy, since spending means more demand for goods and services, which means companies need to hire more employees, which means more spending, and so on.

Additionally, inflation would lower the value of many people’s debt burdens and so help with the painful process of deleveraging.

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Allan H. Meltzer, an economics professor at Carnegie Mellon and a Fed historian. “Raising it, that’s the fun part. Lowering it, that’s the painful part. At some time in the future you’re going to have that pain. Why is it better later than now?”

Some brilliant ideas here. I mean what could possible go wrong.

The inflation option only works if wages increase as well, if they don't you kill demand, although if wages do increase prices might increase faster killing demand...

We are in catch 22 hell and the only available options is default. It's either a debt jubilee or forced mass bankruptcy.

Not sure inflation is fun, but it's certainly no one is looking to end the party yet, more drinks for everyone.

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  • 335 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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