Wednesday, September 21, 2011

The Fed’s Program

The Lehmann Letter (SM)

Today the Federal Reserve announced that it would, “… put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.” This was not good enough for stock-market investors, and share prices plunged.

But what can the Fed do? Interest rates are at historic lows. The Fed can’t push them any lower: At least not enough to make a difference. So we’re stuck. And so is the Fed.

The problem lies in the wreckage of the recent credit-excess and the consequent recession. Household balance sheets are in weak condition, limiting household borrowing and spending. And banks are reluctant to lend, setting stringent conditions to accompany low rates. Result: Weak demand and a stagnant economy.

There’s little the Fed can do.

© 2011 Michael B. Lehmann

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