Quote of the day

Loading Quotes...

Saved by Zero?

The Fed has dropped the target for Fed Funds to “zero to one quarter percent.”

This is quite a remarkable event, not to mention a record low in the rate. It also leaves no room for further drops, as the rate really cannot go negative. This is not the Fed’s only tool, however, they can still flood the system with money by buying back treasuries. Time for a lesson on monetary policy; The Fed removes money from the system by selling bonds, it puts the paper out there and money is removed from the system. Conversely, the Fed may buy bonds which puts money into the system. This directly impacts interest rates further out in the yield curve (different durations or time to maturity).
The risk in all of this is that once money floods the system, the risk of inflation is likely to kick back in.

Leave a Comment