NEMAVue Video's on YouTube

Storm Reconstruction: Rebuild Smart - Reduce Outages, Save Lives, Protect Property

Subscribe to NEMAcast

ANSI Z535 Standards

eicareers Career Center

NEMA Currents

Saved by Zero(ish)?

The Federal Reserve took us into uncharted territory yesterday, cutting the federal funds rate target to a range of zero to 0.25 percent. Interestingly enough, as historical as it was, it didn't really matter whether the FOMC lowered the rate by 50 or 100 basis points since the effective funds rate had already been hovering just above zero for several weeks, making this part of yesterday's announcement mostly a formality. The more important stuff was the actual verbiage inside the Fed's announcement, which basically said some unconventional tools will be employed to deal with the deteriorating economic situation going forward.

Some are calling it Japanese-style quantitative easing, which is not necessarily a flattering reference. Japan endured about a decade of no growth despite numerous attempts to jumpstart the economy through a zero interest rate policy and rapid expansion of the money supply. By contrast, Bernanke and Co. is following a different track than the Japanese, by targeting the asset side of the balance sheet-purchasing mortgage backed securities, agency debt, backing commercial paper and incorporating various loan auction facilities. In addition, the Fed indicated it might pursue the option of buying longer-term Treasurys. By targeting and possibly expanding these line items on the balance sheet, which has already ballooned to more than $2.2 trillion, the Federal Reserve hopes to flatten out the long end of the yield curve. The Fed assumes such efforts ultimately will bid down long-term rates (read mortgages) and rein in yield spreads on corporate debt, with the side effect that financial institutions' willingness to lend would pick back up. It will take some time to determine whether these actions will work, but the Fed appears ready to play those cards and go "all in".


Posted 12-17-2008 3:54 PM by Brian Lego
Filed under:

Add a Comment

(optional)  
(optional)
(required)  
Remember Me?
Copyright © 2014 NEMA. All rights reserved.