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Look Out for Lots of New Cheap Debt
Today at 2:15pm, the Federal Reserve is expected cut its federal funds target rate to half a percent. This would bring it down to its lowest point ever.
The other data coming out are confirming the extent of the economic slowdown. Consumer prices took another record decrease with back-to-back monthly drops – the biggest since records were kept in 1957. But as the rate approaches zero, don’t think the Fed is done.
Chairman Ben Bernanke has other tools to increase liquidity when interest rates hit zero. Perhaps the reason they aren’t using more of them now isn’t an accident. With modern macroeconomic monetary policy being the complex animal that it is, these interest rate cuts could put the Federal Reserve exactly where it wants to be.
Would you rather pay me $100 today or in 50 years? Naturally you’d rather pay me later, when inflation reduces the value of that money. Think of the Fed using that principle to reduce the true cost of our nation’s debt as it increases liquidity.
In addition, if the Federal Reserve continues to borrow money and uses it to replace higher yielding notes, it can significantly reduce the cost of our national debt.
So while the United States may owe more than $1 trillion to the governments of China and Japan, it may not be a bad thing. Perhaps the strategy of “lots of new cheap debt” will pay off for the Fed.
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