“Mark Zandi, chief economist at Moody’s Analytics noted that the still-fragile nature of the U.S. economy illustrates why the Federal Reserve felt it needed to announce Wednesday [11/3/10] a plan to buy $600 billion in Treasury bonds.

Those purchases are intended to lower interest rates on mortgages and other loans and help boost the economy.”

Interest rates are not the problem. Mortgage rates are already at historic lows, and have been for quite some time. The car companies have been offering zero- and low-interest loans for quite a while, yet the annual sales rate is mired in the 10-11 million units/yr. range, far, far off from the halcyon days of 15-16 million units per year in the early 2000’s. Home equity loan rates are in the very low single digits, with virtually no room to go lower. Lowering rates from 1.5% to 1.25% or 1% won’t do anything.

This Fed action will not have any meaningful positive effect. Fed Chairman Ben Bernanke undoubtedly knows this—this is very likely an action undertaken strictly for “public consumption,” an attempt to show the consuming public that the Government is “doing something,” which would then, presumably, buoy customer sentiment and spur increased economic activity.

In fact, it will have several very tangible negative effects:

1. It will reduce (or cause to remain unchanged at the current virtually-zero levels) the bank interest yield on savings and CDs. Most seniors rely on their interest returns for a major portion of their retirement incomes. When CDs were yielding 5% just a few short years ago, a senior with a ‘life savings’ of a modest $200,000 could expect an income of $10,000/year from CD interest. Combined with their Social Security benefits, that’s not so bad.

Now that $10,000 is reduced to $2000, a drop in real money that’s close to disastrous for many older people. Combined with no COLA adjustment in Social Security for the past two years, and for many it’s a dire situation.

2. The Fed’s actions will further reduce the dollar’s value on the world’s currency market, resulting in an increase in crude oil pricing. This in turn will drive up both home heating oil and gasoline pricing, eroding real buying power, and undermining consumer confidence even more. Simply on the announcement of the Fed’s intended actions, crude oil spiked this week to $87/bbl, the highest it’s been in a year—and it’s headed higher.

3. If the Fed had instead announced that it would reverse its policy and raise interest rates in the near future, this could very well have spurred people to act on buying and borrowing now, before rates go up, with the agreeable byproduct of increasing seniors’ incomes.

The Fed is an independent branch of Government, supposedly non-partisan and non-aligned. But “clueless,” “unimaginative and “stubborn” should not be among their prominent traits.

Comments

  • http://www.wildfiretreasures.com/ Troy La Mana

    It’s a way to undermine the US Dollar. Do you think Soros had anything to do with it?

  • Red State Eddio

    Looks like ideology (Keynesian) trumps reality, common sense, and wisdom.