Thursday, November 14, 2013

Interest rates back-up continues



In the land of cheap money, Treasury bond rates are at 2011 levels. The Fed buys $85 billion in order to get inflation up and real rates down yet we have been in a march higher for rates all year. We are seeing inflation fall and real rates rise. This does not sound like a policy that is working. Of course, the answer is that you should see what would have happened if we did not follow this policy.

 So if the policy is not working the logical step is to continue doing more of the same. There is a lag between policy action and response. This is well known, but we do not know what the lag or response to QE  will be. The Fed research suggests that the emphasis is on forward guidance not the purchases. So what is the right policy?

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