This article tells about the new plan that Fed has come up with to help boost the sluggish economy. In an attempt to boost the financial markets, Fed is planning on re structuring its balance sheet by selling $400 billion of short term bonds and buying long term bonds. This is being done to drive the long term interest rates lower so that investors are induced to invest in new projects and hence boost the economy by providing much needed jobs. The short term rates are already near 0% and by decreasing the long term interest rates Fed would be able to increase investments in housing as people will find it lucrative to buy houses when mortgage rates are low. Thus helping bring back the housing market to life.
One problem that the Fed will face is that when the interest rates on long term bonds decrease their prices will increase as a result investors will be willing to sell their bonds at higher prices which again will increase the interest rates.
Will this strategy of Fed work or not, only time will tell till then we have to keep our fingers crossed.
My only worry about this plan is that since the inflation rate is at an all time low, if it went any lower, or into negative numbers, the economy would be in serious peril.
ReplyDeleteInvestments need to be increased, no excuses. But it this is at the cost of the inflation rate I think we need to pursue other measures than "The Twist."
I think this method will only work in the short run because eventually the interest rates will increase therefore people will save more rather than spend.
ReplyDelete