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Biotech / Medical : 2012 Biotech Charity Contest
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To: IRWIN JAMES FRANKEL who wrote (306)6/26/2012 5:35:41 PM
From: Chris08  Read Replies (1) of 513
 
You mean a rate of 1.6% on a 10 year Treasury is too high? What kind of interest rate would you like? 0.5%? Inflation is already as high or higher than the 10 year rate meaning people are lending money to the government for free! One reason the Fed can't get much traction to stimulate the economy is that interest rates are at the "lower bound" (I presume you understand that). As a result QE doesn't have much of an effect. Putting more money into the economy tends merely to fill savings accounts. Businesses have loads of cash they are not investing due to lack of demand.

From the Fed Reserve bank of (I forget which one):

Given the markets’ limited experience with very low interest rates, it is difficult to predict with any degree of certainty how they will react to them. If the types of disruptions described above turn out to be significant, taking steps to lower short-term interest rates could actually make financial conditions tighter rather than looser and thus hinder the economic recovery. To avoid this outcome, policymakers tend to choose policies that keep market interest rates positive. In other words, the potential for negative interest rates to disrupt financial markets limits the extent to which policymakers can stimulate economic activity by lowering interest rates. This limit is known as the zero lower bound.


US rates are already probably too low for the good of the economy. Yield on a 5 year government bond is now 0.72%, less than 1%. Too high for you? That's a NEGATIVE interest rate.
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