Federal reserve had FOMC (Federal Open Market Committee) meeting on August 9th (Bit dated...) and Fed Chairman Ben Bernake announced that they will keep Federal fund rate at zero percent until mid 2013. When I heard this statement, I got it right away that they are very desperate to protect the bond market crash. In other words, they are trying so hard to make the interest rate as low as possible because of US sovereign debt situation.
As I explain in the last blog, current US government debt is more than $14.4 trillion and if other entitlements, such as social security, medicare and medicaid included, amount of debt will well exceed $100 trillion. So far, they can still manage this debt load due to record low interest rate. Imagine if this interest rate went up, lets say 10% instead of current interest rate of 1.5%, what is going to happen in the US economy? Bond market will definitely implode if this happens. In order to stop this, Fed keeps interest rate from 0 to 0.25% so that federal government can borrow money from the Fed at very low rate instead of looking for the buyers (no one will buy).
In this coming September 20th, there will be another FOMC meeting and very interesting to see what Ben Bernake will say in this coming meeting. In current situation, Fed options are very limited since rate is already near zero and they just announced to keep rate low for more than 2 years. If Fed announce QE3, inflation surely go through the roof and I won't be surprised to see inflation rate of 20, 30, even 50% in very near future. Anyway, let's see what they will say on September 20th.
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