Federal Reserve Moves Into Uncharted Territory
What’ more interesting than the Federal Reserve dropping short term interest rates to a range of 0-0.25% is what creative things Ben Bernanke will do next when the Fed finds their latest effort has been ineffective. Right now, the Fed is pushing on a string. More credit and liquidity isn’t instilling confidence in financial markets. Without that banks won’t lend which means business investment is on hold.
Until then the Fed will try things like buying long-term treasury bonds or increase rates on holdings banks have with the Fed.
Confidence builds when a few firms feel comfortable in taking small risks. When those pay off they’ll try bigger risks. Upon those successes the firms and others around them will see money can be made.
[via memeorandum]
One of the most encouraging signs, I think, is that the Fed’s balance sheet has stopped growing in the past month, an indication that it has, for now, sated corporate and financial borrowers’ demands for short-term credit. Of the $150 billion of short-term loans that the Fed offered this week, banks bid for only $63 billion worth.
That pause is almost certainly temporary. In the coming months the Fed will inaugurate several big new lending programs, including a facility for backing asset-backed securities and the purchases of MBS. Although the financial backdrop has, for now, stopped getting worse, the Fed is taking no chances.