Sunday, April 24, 2011

Fed's QE Plan Not Creating Growth

link here to article

When the Fed cuts short term interest rates to zero, it has to look for new ways to stimulate the economy since short term rates cannot be cut below zero. It decided to emulate the Japanese plan to fight off price deflation by purchasing longer term Treasury's in the secondary market. The idea is that reducing the supply of longer term bonds in the secondary market would increase prices and lower interest rates. Since the Treasury sold an equal amount of bonds in the primary market, the plan has only kept mortgage rates and long term rates from rising. This put a floor on economic decline but it has not stimulated economic growth. Moreover, it complicates the exit strategy when the Fed decides to end QE.

The growth problem does not seem to be interest rate related. Large corporations can borrow at low rates and they are flush in case. They are waiting for demand to increase before they invest. Small businesses do not have the same access to cash so they are not investing either.

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