The Federal Open Market Committee (FOMC) of the Federal Reserve has announced in its September statement measures to lower long term interest rates and mortgage rates through portfolio management of its government bond holdings of varying maturities without injecting new money into the financial system because data points to an uncertain economy. Inflation is experiencing downward pressure because of a slowing economy which, despite not being declared as a recession by the National Bureau of Economic Research (NBER), is in a recession.
Long term interest rates directly affect borrowing by corporations to invest in equipment and employment to preempt a slide into another recession and to support economic recovery. Commercial banks earn their revenue through conventional long term lending to businesses, though their profits may be squeezed because of the narrowing of spreads between short and long rates due to the Fed’s actions. At the same time corporate cash and bank reserves at the Fed exceed $2 trillion, money that is not being invested in the economy.
Fed’s actions do not fundamentally change its position to supply money at near-zero Federal Funds rate through mid-2013.
Any marginal lowering of long term rates and home mortgage rates because of the Fed’s actions may not boost domestic real investment in the economy in the near term to create employment because of the continued rise in government debt and the more activist role of fiscal policy in the economy.
To reiterate, we recommend that the United States of America do three things to address investor anxiety for lifting investor expectations:
1. Freeze the Federal budget through 2022 in 2012 nominal dollars without indexing for inflation within which constraints the government must be reformed.
2. That the Federal Reserve make industrial policy also serving as an investment bank for the United States.
3. Reform Dodd-Frank financial regulatory law to divest the Federal Reserve of financial markets supervision and the conduct of consumer relations from within the Federal Reserve.
To promote job creation, Transformations LLC advises the Federal Reserve to make money supply conditional on real investment in all three economic sectors: agriculture, industry and services and broaden its portfolio to purchasing commercial paper issued to this end together with financing the American Infrastructure Financing Authority (AIFA). It must also urge the Congress to overhaul the tax code to favor investment.