The Look Ahead

June 27th, 2012

 

On Wednesday, the FED announced a
continuation of its tactic (often referred to as “Operation Twist” by the news
media) whose goal is to stimulate the economy through lower interest
rates.  The stock and bond market’s reaction was terrible.  I suspect
the FED is losing its ability to stimulate the economy through lower interest
rates.  Why?  Interest rates have fallen so low that lowering them
more does not create sufficient incremental benefit.  For example, home
mortgage rates are generally based upon the 10 year maturity U.S. government
bond which currently yields about 1.6% down from 7.3% 20 years ago.  How
much lower can the 10 year U.S. Treasury drop?  And, how many potential
home buyers would receive enough incentive to make a difference to buy vs not
buy a house if the rate on the home mortgage were 3.10% instead of 3.25%? 
I think the markets are realizing the FED’s ability to stimulate has vastly
diminished.  It’s up to Congress and the White House to lead or get out of
the way.  

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