Tags: Fed | Rate | Policy

FT: Why Fed's Rate Policy Isn't Working

Friday, 30 Sep 2011 12:47 PM

By Michelle Smith


The Federal Reserve has unveiled another plan to help alleviate the nation's problem, “Operation Twist,” which again attempts to manipulate interest rates. However, the Financial Times reports that the efforts aren't working because the U.S. economy is “bifurcated.”

Operation Twist, the Chicago Tribune explains, will shift $400 billion on the Fed's balance sheet from short-term to longer-term securities. The idea, in part, is to keep mortgage rates low, supporting a housing market that shows every sign of dragging down the economy for years to come.”

In lowering long-term borrowing costs, the Fed and chairman Ben Bernanke aim to supply more credit to the business sector and mortgage world, the Financial Times reports.

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Ben Bernanke
(Getty Images photo)
In a bifurcated economy, even if borrowing rates go down, getting loans isn't easier for the people who most need them.

The Financial Times clarifies this by highlighting points from an International Monetary Fund (IMF) report. Many large American companies, particularly those with global operations, are highly profitable and liquid. Unsurprisingly, for them bank lending conditions and capital market financing remain easy.

But, many small and medium-sized companies – or the entities that typically create jobs inside America, not overseas – find it hard to raise funds, the Financial Times continues.

The Tmes points to similar problems in the housing market, noting points from a Institute of International Finance report. “In order to take advantage of lower mortgage rates, borrowers have to refinance their mortgages, which can be difficult to impossible, if the value of home equity has been eroded.”

Operation Twist, in other words, does nothing for households with negative equity (estimated to be about a quarter of the total); the Financial Times points out, nor those in distress (another quarter.)
Worse still, Fannie and Freddie are not allowed to refinance their loans.”

Implementing the best strategy to address these problems is one issue.

However, the nation faces others that aggravate the situation. Prime examples are the lack of consensus (even the 10-member Fed is currently split 7-3, the Chicago Tribune reports) and the looming uncertainty in the eurozone, which make banks increasingly hesitant to lend.

"I wouldn't say we're out of bullets," Richard Fisher, president of the Federal Reserve Bank of Dallas, told the Chicago Tribune, “but whatever ammo is left "we need to deploy very, very carefully."

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