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Interest Rates

Thursday, 08 December 2011 09:53

After promising to keep a key short-term interest rate near zero at least through the middle of 2013, the Federal Reserve is trying to lower long-term rates, already at record lows. That will keep a lid on borrowing costs for a while, but it won't do much to help the economy.

Commercial banks will keep their prime lending rate at 3.25% into 2013. The 10-year Treasury note, a benchmark for mortgage rates and corporate bonds, should remain near its current rate of 2% until growth picks up, which won’t be sooner than mid-2012.

The Fed’s method of lowering long-term rates is a plan to sell $400 billion worth of short-term debt and buy Treasury notes and bonds with maturities of six to 30 years.

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Markets Move After Fed Meeting, But Why?

In This Issue

Last Week in Review: Fed maintains status quo while markets look for more direction.

Forecast for the Week: Economic reports to watch, plus the future of housing finance.

View: 5 financial lessons every college student should learn before heading to school.

Last Week in Review

"The great thing in the world is not so much where we stand as in what direction we are moving." Last week, the financial markets appeared to agree with Oliver Wendell Holmes' words by looking for some more direction from the Fed after its FOMC Meeting.

While the Fed didn't say much, they did state that Mortgage Bond holding income and proceeds would be reinvested into Treasuries. This helps the Treasury continue to pump out debt at low rates. But this relationship is a concern to the Stock market, as there is no doubt that this will lead to further problems down the road. In addition to "kicking the can," the Fed did not provide a game plan on how it could handle deflation, a Japanese type economy, or longer-term inflation. This uncertainty is something that the Stock market hates. As a result, investors pushed Stock prices significantly lower in early trading Thursday - and the cash sale proceeds from Stocks found their way into Bonds.