Wednesday, May 27, 2009

Fed May Have to Keep Rates Near Zero for Years

This is recapitalizing the banks at the expense of savers, pure and simple.
From the Wall Street Journal's Real Time Economics blog:

Strains on the U.S. economy are so profound the Federal Reserve will be shackled to its zero interest rate policy for years to come, a San Francisco Fed economist argues in new research.

Writing for the bank’s Economic Letter, Glenn Rudebusch says the Fed’s history and its current economic expectations indicate “the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years.”

The economist said the Fed will need to maintain this stance in part because its current interest rate policy is not easy enough, having been constrained by an inability to go below zero.

“In order to deliver a degree of future monetary stimulus that is consistent with its past behavior, the FOMC would have to reduce the funds rate to -5% by the end of this year — well below its lower bound of zero,” he wrote. That’s not possible, and it explains why the Fed will have to keep rates where they are for such a long time....MORE

See also:
April 2009
Free Money Good for Bank Earnings, says Faber

December 2008
"Mom, Ben Bernanke Likes Bankers Better than He Likes You"
...Savers are getting screwed as banks reliquify their balance sheets.
The ostensible reason short rates are now officially at 0.2% is to encourage banks to lend.
It's not going to happen. The banks are not taking on individual's or commercial's risk. Auto loans for a FICO score of less than 720 aren't being written.
So what are they doing? Carry-trade (say it like "Toga party").
For months, the borrow U.S. short, lend U.S. long has been used to rebuild banks balance sheets, destroyed by their former business practices.

Now with the Fed explicitly committed to lowering long rates (the 30-year trading at 2.63%, the 10-year at 2.144%), even borrowing at 0.2% doesn't give enough spread to run cash flow through the income statement and onto the bank's balance sheets.
What will the banks do? My guess is they will start buying sovereign debt for the yield, maybe even selling it to the Fed so they can take the money and do it all over again.
Right now Australian 15-years are priced at 4.20%.

Today, the American saver gets a pittance in a money market. It's really nothing but a wealth transfer racket.
Mom, we're going to Sydney.
Similar thoughts at "Investment Postcards from Cape Town":


...Hat tip: Mish, Global Economic Analysis

...Sharing my sentiments, Bill King (The King Report) commented: “Ben Bernanke and the Fed just screwed everyone in the US, and some abroad, that played by the rules, was prudent and live on fixed incomes. Ben, just like Easy Al, is once again redistributing wealth from the prudent, the savers and retirees to the reckless and the boobs that created this mess. But the Fed, via its communiqué, is admitting that it is petrified of what is occurring in the economy and financial system so it is now in all-out money/credit dump mode.”...