I understand that, which is why I mentioned the FOMC since that is what they do. However the fed has had to work mightily to lower long term rates using that mechanism and they have had to buy hundreds of billions of securities in the process. This is far from the direct rate setting mechanism you seemed to be implying.
Also you should understand that although a central bank has enormous power to bludgeon markets into submission, it can’t control them with any precision.
If it’s any consolation, you’re doing way better than LinusK who just repeats the same errors in new threads even after the mistakes have previously been corrected. And he’s far from the worst offender even in this single thread.
As long as you’re more adaptable than that, you should be fine.
Not true.
There is no necessary relationship between the amount of the monetary base and long-term yields. Sometimes there is and sometimes there isn’t. If there’s a liquidity crisis, then a central bank offering to lubricate the system will drive down long yields, as happened in late 2008. But an increase in monetary base could just as easily result in an increase of long-term yields, depending on general economic conditions and the specific nature of what the central bank is attempting to buy in the open market. As is patently obvious from the graph, the 10-year Treasury yield has dropped strongly in the last year and a half, without much movement in total base money.
Expectations. It’s about expectations.
Every single thing the Fed does, every button they push on their computers, can be totally undone with a different button they push the next day. What’s important is not just the current amount of monetary base, not just current rates, but expected policy out into the future.
Ignoring this dynamic doesn’t make it go away.
Just as a guess, maybe he’s referring to the current situation where the proceeds of securities sales tend to end up in excess reserves, which now overwhelming dominates MB.
But as you say, that’s a reflection of the current environment. Specifically, underwriting criteria have been tightened so much since the crisis that many few people qualify for loans. Add to that the anemic level of economic activity and loan demand is lackluster. As a result, banks tend not to have an outlet for their excess reserves whereas perhaps under other circumstances that would not be the case.
I’ve already made my comment in this thread, but want to offer sympathy to deltasigma whose comments are generally correct and insightful, but are being unfairly criticised here. To reiterate one of his points, the U.S. is already “printing money” in effect since much of the recent debt is purchased by the Fed. That new money just exists on computers since, as some in the thread still don’t seem to grasp, banknotes (portraits of Benj. Franklin) are irrelevant chits issued primarily at Christmastime for the convenience of cash users.
Whether Fed purchases have a significant effect on the price of long-term Treasuries is, I think, unknown.
I don’t know that he is. He’s more of a descriptivist than a prescriptivist. In the quote you refer to he was fretting over the trade imbalance, which is rather the opposite(*) of fretting over a weakening dollar. (I think he sees several currencies as weak; i.e. the Dollar/Euro ratio won’t decline since Europe has its own problems.)
ETA: weakening dollar is remedy to trade imbalance.
Sorry to keep harping on this minor detail, but in one of the Social Security is a Ponzi Scheme threads, one Doper made quite clear that he thought U.S. banknotes were Real Money™ with a status similar to gold bullion, and that exchanging this Real Money for U.S. Treasury bonds of doubtful integrity was a sort of fraud. :smack: (With misconceptions like that even at intelligent SDMB, it is no surprise Congressional elections often go to the zaniest candidate.)
Septimus: Thank you for the vote of confidence. It’s appreciated.
From reports I see and hear, the consensus seems to be that the aggressive policy of QE (quantitative easing), sometimes called QE infinity, since they had been labeled QE 1, 2, etc., has been effective in flattening the yield curve. This can be done a couple ways but specifically what is meant is flattening via a decline in rates at the long (10-30 yr) end.
Here is the treasury’s plot of daily yield curve components. The link is to 2011, but you can easily look at other data ranges. It’s not too dramatic for 2012, but 2011 is impressive.
A very good indication of this is mortgage rates. They are the lowest they’ve been I think since the 50’s or maybe 60’s although I would have to check. And this also sort of explains the popularity of bonds despite the very low interest rate (with inflation). Everyone has been counting on the fed to continue this policy and for rates to continue to decline. That creates very nice capital gains for bond holders.
Doesn’t the very fact that if the Fed does something that Congress or the President doesn’t like, that a law can be enacted curbing their independence, make it de facto not independent? It may restrain itself for fear that a law would be passed.
You might think so, but recent history since the 80’s doesn’t seem to bear that out - at least not for the reasons one would commonly assume. This is just my opinion though.
Paul Volker for example forced interest rates up into the double digits for mortgage loans. I remember it well since I was working at a mortgage bank at the time. But he knew it was the only way to kill the stagflation that seemed intractable at the time.
Greenspan on the other hand I’m not so sure about so you may have a point there. I honestly don’t know what the man was thinking when he kept lowering rates in the face of the worst housing bubble of modern times. I suspect he may well have been politically motivated. However I very much doubt that he had any fear of Congress eviscerating the fed.
Same thing with Bernanke. He’s very much in tune with Obama’s policy goals I think and I’m sure there is a significant level of coordination there. But again, I very much doubt that it’s motivated by any kind of fear.
When ordinary people borrow money, they can’t borrow from themselves. But when the government borrows, it can, and does, borrow from itself. Whenever the Fed buys Treasuries, it’s the government lending to itself. The money is called base money, and it’s the base of the financial system. It’s the folding money in your pocket, and what commercial banks use as reserves. Every modern country does this, although the Euro countries do it a little differently. And china uses its base money to buy Treasuries, which depresses the value of the yuan, drives up the value of the dollar, and helps support their exports to the rest of the world.
Printing money doesn’t push up interest rates - it reduces them. Printing money creates demand for things you can buy with money, including interest-paying financial instruments, like Treasuries. It also creates demand for goods and services. If you print so much money that the economy can’t deliver goods and services fast enough to satisfy demand, then you get inflation. We don’t have inflation now, because despite all the money we’ve printed, our economy is so big, and so productive, we still have unmet capacity. In other words, factories that are sitting idle and people who want to work but don’t have jobs. Once our economy is operating at full capacity, if we continue printing money, then we will have inflation.
Of course, once our economy is operating at full capacity, a lot of the problems we have now will have fixed themselves.
That’s a good point and I just want to add something that might help people think about monetary issues. The interest rate can be seen as the price of money. It’s odd to think of money having a price, but in fact it does and that’s what the interest rate is.
So just like any other market, supply and demand is an important factor. If supply is greater than demand, it depresses the price and vice-versa.
But as Linusk also pointed out, the reason it’s a double edged sword is because of inflation, or more specifically, inflationary expectations. Once people believe that prices will continue to go up, it becomes a self-fulfilling prophecy and less of a strictly monetary issue.
The Fed is part of the government: (From the Fed website)
You didn’t quote thelast paragraph.
I probably did overstate the connection to private banks however there’s no denying that one exists - as you can see. And we can probably argue all day about how best to characterize the fed. The only think I really want is that people who actually have the patience to read our ramblings will walk away with a little clarity. So in this instance I was probably an obstacle to that.
Correct. And I don’t think anyone has said otherwise. But IF WE DID as the OP suggested, then we would lose credibility among investors. And the FED could buy as many bonds as they wanted at whatever interest rate, but other countries would see that as simply our inflating our currency. Then they would quit buying. Then we would need the FED to buy more bonds (printing more money) and then, it’s Chinatown.
And it would happen pretty damned quick. What if our foreign investors got nervous for some reason and demanded double the current interest rate? What would we do except have to borrow more money to pay for our spending habits? That starts the inflationary cycle..
About 2 years ago I think it was, the fed was very concerned that the quantitative easing could in fact accelerate out of control - as can happen with fractional reserve banking sometimes. And because the amount of liquidity that they had pumped into the system was so far beyond anything done previously, standard mop-up techniques weren’t going to work.
They needed to come up with something that could drain vast amounts of liquidity quickly. So they came up with this reverse repo (repurchase) plan that involves money market funds. They’re the only ones that have enough ready cash to do the deals required. Here’s an oblique reference to it in a fed communique but I’m sure there are news articles on it - just didn’t find them right away.
So the point is that they were in fact very concerned about the dangers attendant to what they were doing and tried to have mechanisms in place to deal with the consequences. And it’s still a danger. It will be untill those excess reserves are drained and the financial system gets back to something akin to normal.
Well, sorry to continue to be wrong, even after having been corrected. If this were your classroom, I guess I’d get an “F”. But to address your point, to the extent I understand it, I guess I’d just say that historically the relationship between what the Fed wants the interest rate to be and what it is is pretty tight, and that the Fed is able to control interest rates because it controls the amount of reserves in the banking system.
My understanding is that the Fed increases interest rates in the face of producer commodity price inflation, and not asset price inflation, but this seems inappropriate to me, especially since many producer goods (petroleum, metals) are traded internationally so not easily subject to domestic price influence. Do others feel as I?
Greenspan’s rationale for allowing the bubbles to fully inflate and burst under their own weight was, paraphrased, “Why spoil the party? Everyone’s having so much fun!” Yet I wonder if there’s more to this than meets the eye. In 1996 he issued a veiled “irrational exuberance” warning at a right-wing think tank. Since smart big speculators can get huge returns at the expense of the little guys during a bubble, one could concoct a conspiracy theory in which Greenspan, a disciple of Ayn Rand, would play a major role in a huge transfer of wealth.
For a while, Greenspan was called “the most powerful man in the world … more powerful than the President.” Could it be that this was no exaggeration?
I wasn’t really paying much attention to such things back then. I remember that comment very clearly though since I happened to be working at a brokerage then and it was big news.
Personally, I don’t think the fed worries too much about ordinary inflation created solely by market forces since as I think you’ve implied, they have the tools to deal with that. What’s really problematic is when inflation becomes endemic and people and businesses incorporate those inflationary expectations into their planning. That’s when you bring out the big guns as Volker did and jack rates up into the double digits. At that point it’s all about building confidence and much less about actual monetary policy - at least that’s my understanding.
As for Greenspan, I vaguely recall his comment being something along the lines of, it’s not our job to interfere in markets that are functioning properly - or something like that. And I guess you could read that as you said. The bottom line is the same - we’re not sticking our nose in.
But all of the commentary I heard when he said that was pretty much negative. I think a lot of people couldn’t really believe that was a straight up, honest answer. But people who knew him seemed confident it was - it’s just how he thinks - which sort of explains his Rand love affair I suppose.
If inflation is such a problem that people incorporate inflation into their planning, why does the Fed need to step in? If I look at the economy and my smartest people tell me that inflation next year will be 20% (let’s say). I know that my investment must return 20% just for me to break even. I won’t loan anyone money at less than 20% (plus whatever profit I want to make+risk, etc.) interest. Neither would anyone else. Where does the Fed play a role in this?
What about the people who live on wages rather than investments?
I think it comes back to the interest rate being the price of money. If inflation is an indication that money is too cheap, or IOW, the supply is greater than the demand, then the fed steps in to reduce the supply of money. That has the effect of raising interest rates.
And when there is a psychological component in the form of inflationary expectations, that serves double duty to show that fed simply won’t tolerate a high rate of inflation. In case of Volker and the stagflation of the 70’s and early 80’s, I believe he went overboard in tightening monetary policy to make sure he drove his point home to the markets. It took a few years and double digit mortgage rates, but people eventually figured out that he was serious.
