Dec 02 2008
The Fed buying notes and bonds concerns me
The Fed could be a big buyer of long-dated Treasuries as a way to help stimulate the economy. That’s what Big Ben said yesterday. I’m a little bothered by this. If the Fed isn’t lowering short rates – basically because it can’t do much more there – but is dropping long rates as a result of its purchases, it will flatten the yield curve. A flatter yield curve isn’t a good thing – at least for encouraging bank lending and generally improving the profitability of the banks. This strikes me as contrary to what we should be after here.
But then to my mind the bigger question is loan demand. The Fed and Treasury can get rates down to near zero, but if no one’s borrowing it doesn’t matter an iota. Consumers seem to be more inclined to reduce debt at the moment, not increase it. Lower rates will definitely help refinance debt, but that’s not the same as stimulating new debt-based spending (houses, cars, etc.). To the extent that this sort of thing eases personal and family budgets, it could help lower level spending – assuming folks don’t just put the excess to work paying down debt.
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