Can anyone help me decipher what it is that The Fed decided to do, please? Plain English, please. http://dailybail.com/home/full-text-of-federal-reserve-rate-decision.html
Sell short term bonds to buy long term bonds which prolongs low interest rates. It is intended to make borrowing cheaper for businesses and consumers for a longer period of time, which would hopefully encourage lending/borrowing. The problem I see with this is that it lowers the rate spread, so banks will actually earn less money on their loans now. This will actually possibly discourage banks from lending, or it will lower their profit margin, which will hurt banks that are already struggling. Overall I see this as either having no effect whatsoever, or it will put increased pressure on struggling banks, which could ultimately lead to them failing and causing even more of a financial mess. To be blunt, this move was worse than doing nothing at all. Even many our of mindless politicians knew that, but were unable to persuade Bernanke not to make the move.
Ain't no one lending anything here in Oz by my own humble experience. Credit market is as tight as... well lets just say its tight
It also does no good because there aren't many businesses willing to borrow to expand due to the poor economic conditions. If there's no-one to buy your products, why would you borrow money to expand? Even if the interest rates are at record lows? There's nothing much they can do until the deleveraging process has run it's course but they have to be seen to be trying to do something. It'll be Australia's turn for the deleveraging process soon.
I thought I should try to be optimistic and follow up with some possible positive outcomes... 1. Fed moves creates incredibly low interest rates. Consumers and businesses can refinance at great rates and A) be able to pay off the loans sooner, or B) have more free cash flow to "invest" in other ways (i.e. spending, saving, actual investing, etc.). Either way, the financial strength of consumers could improve and ultimately provide a real economic stimulus and return to "normalcy". 2. The incredibly low interest rates will negatively impact savings rates, meaning keeping your fiat in the bank will be even more impractical now. Therefore, consumers and businesses looking for a real return on their fiat will be forced to invest it in alternative investments (equities, metals, etc.). This could ultimately be bullish for the stock and metals markets, causing a significant rally and boost the financial confidence of all parties, which would lead to more willingness to take on debt and spend, and after a while we would start the cycle all over again, but not before stocks and metals all hit nice new highs and us savvy stackers took some profits along the way. Cheers.
