“To infinity and beyond!”
The exclamation that was once the tagline for Buzz Lightyear is now the rallying cry for the Federal Reserve’s position on the duration of ZIRP (Zero Interest Rate Policy).
Earlier today, Chairman Lightyear extended the Fed’s ZIRP language from lasting until mid-2013 to “until at least late 2014.” I know that “jawboning” is one of the Fed’s tools, but we’re now telegraphing interest rate policy 2+ years into the future?
Immediately after the announcement, the Treasury yield curve shifted sharply downward, with the yield on the 5-year Treasury dropping to 0.77% — a decline in the yield of 13.6% and a new record low. On the long end, 30-year yields fell to 3.07%. Predictably, equities rallied on this QE-Lite announcement; with the Dow tacking on 118 points (and counting) from its pre-announcement level. Gold spiked by $36, pushing the price over $1, 700.
Seemingly infinite ZIRP raises a couple of questions regarding the rationale: 1) Is the economy so weak that rates must be held at zero for the foreseeable future, or 2) Is this a way for the Federal government to continue its borrowing spree at “affordable” rates?
Neither explanation gives me a warm, fuzzy feeling.
Other points from the Fed (parentheticals are not courtesy of the Fed):
- The unemployment rate remains elevated. (Duh.)
- Business investment has slowed. (Who knew?)
- Inflation is expected to remain at levels consistent with stable prices. (Unless you eat, drive, or use Dollar-denomiated commodities.)
Chairman Lightyear also apparently holds the title of Captain Obvious.
It would be kind of funny, if it wasn’t distorting virtually every financial market.
Later today, in an effort to provide additional transparency, the Fed will publish individual policymakers’ projections for the future of the Fed Funds rate. That announcement is to be made sometime after 2 o’clock. I’m going to go out on a limb here and give my projection. Zero. To infinity. And beyond.