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You speak as if there is something that can done about it. There is no way for the government to push rates, especially on exotic collateralized products like

You speak as if there is something that can done about it. There is no way for the government to push rates, especially on exotic collateralized products like you describe. The Fed can play around at the low end and set an overnight rate, but not much else. Historically, the Fed has tried and failed over and over to affect the long end. And it certainly doesn't have the stock to dump long bonds to drive yields up. Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market.

NTDF9 7y ago
Why can't the Fed manipulate long term interest rates?
- jnordwick 7y ago
  They don't really have a mechanism, and rates are set in the global market - return on capital is mostly a global issue now and something the fed has no control over. They can target the overnight rate and buy and sell short term funds because they are the majority player there, but even then the actual Fed Funds rate doesn't always equal the target they are trying to set (and not by a few points either). On the long end they are more constrained. They can print a ton of money to cause inflation, but going the other way just isn't as easy. They aren't the major player there either. Long term treasuries compete with every other debt instrument out there government and private. Those rates are global for the most part Just look at the late 90s when the Fed tried to push long term rates up and failed horribly. All they did is invert the curve. It is a repeating scenario. This same conversation comes up about once a decade it seems.
- JamesBarney 7y ago
  They can, they just don't have a direct tool for doing it. Long term rates are just an aggregation of short term rates over a given time span. So they can adjust long term rates via promises and hints that they will keep short term rates low for a long time. There is a ton of interesting monetary theory about how the Fed can do this and issues they run into.
  - jnordwick 7y ago
    long term rates are more than short term rates added together. while related, short term rates are much more driven by central bank reserve and regulatory policy, and long term rates much more driven bvy return and inflation expectations. In a real dollar sense, the fed has zero ways to affect long term rates.
    - JamesBarney 7y ago
      Sure there are other factors that affect long term rates. But if the Fed came out tomorrow and said "We promise to keep interest rates at 0 for the next 10 years" long term rates would drop considerably wouldn't you agree?
      - jnordwick 7y ago
        Not at all. Inflation expectations would soar. A few years ago and there talk was that keeping the overnight rate would lead to huge inflation issues. Now a strange narrative is appearing that nominal interest rates are simultaneously too and inflation going higher. And there is no way they would be to keep that rate. They can say whatever they want, but that doesn't mean the overnight rate has to oblige them either. They only set a target, the actual rate is still determined in the bank to bank market and historically it does diverge, sometimes strongly.
  - skybrian 7y ago
    I'm curious, why can't they manipulate it directly? It seems like if a central bank bought enough long-term bonds, supply would drop enough to raise the price?
    - MR4D 7y ago
      My guess is because the amount of Treasury bonds would dwarf what the fed can buy. In other words, the Treasury dept is the one that has more power here.
    - pas 7y ago
PeterisP 7y ago
Unilaterally pushing up nominal interest rates is trivially achieved by rising inflation by devaluing currency by printing lots of it and spending it on pretty much anything. It would pretty much instantly hike up the nominal yields on pretty much everything USD-denominated to match the (now) higher inflation. It doesn't mean that it's a good thing to do as it has all kinds of other effects, but in general the governments have the ability to do this should they choose to, it's just that they keep pinky-swearing that they won't do it, making legislation that makes it tricky to do without consensus (but they can repeal that if both parties agree that it's the way to go) etc.
nonbel 7y ago
> Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market. The fed causes the inversions every time by pushing up the short term rates until they are near or above long term... It is ridiculously obvious if you just look at a plot of this.

NTDF9 7y ago

Why can't the Fed manipulate long term interest rates?

jnordwick 7y ago
They don't really have a mechanism, and rates are set in the global market - return on capital is mostly a global issue now and something the fed has no control over. They can target the overnight rate and buy and sell short term funds because they are the majority player there, but even then the actual Fed Funds rate doesn't always equal the target they are trying to set (and not by a few points either). On the long end they are more constrained. They can print a ton of money to cause inflation, but going the other way just isn't as easy. They aren't the major player there either. Long term treasuries compete with every other debt instrument out there government and private. Those rates are global for the most part Just look at the late 90s when the Fed tried to push long term rates up and failed horribly. All they did is invert the curve. It is a repeating scenario. This same conversation comes up about once a decade it seems.
JamesBarney 7y ago
They can, they just don't have a direct tool for doing it. Long term rates are just an aggregation of short term rates over a given time span. So they can adjust long term rates via promises and hints that they will keep short term rates low for a long time. There is a ton of interesting monetary theory about how the Fed can do this and issues they run into.
- jnordwick 7y ago
  long term rates are more than short term rates added together. while related, short term rates are much more driven by central bank reserve and regulatory policy, and long term rates much more driven bvy return and inflation expectations. In a real dollar sense, the fed has zero ways to affect long term rates.
  - JamesBarney 7y ago
    Sure there are other factors that affect long term rates. But if the Fed came out tomorrow and said "We promise to keep interest rates at 0 for the next 10 years" long term rates would drop considerably wouldn't you agree?
    - jnordwick 7y ago
      Not at all. Inflation expectations would soar. A few years ago and there talk was that keeping the overnight rate would lead to huge inflation issues. Now a strange narrative is appearing that nominal interest rates are simultaneously too and inflation going higher. And there is no way they would be to keep that rate. They can say whatever they want, but that doesn't mean the overnight rate has to oblige them either. They only set a target, the actual rate is still determined in the bank to bank market and historically it does diverge, sometimes strongly.
- skybrian 7y ago
  I'm curious, why can't they manipulate it directly? It seems like if a central bank bought enough long-term bonds, supply would drop enough to raise the price?
  - MR4D 7y ago
    My guess is because the amount of Treasury bonds would dwarf what the fed can buy. In other words, the Treasury dept is the one that has more power here.
  - pas 7y ago

PeterisP 7y ago

Unilaterally pushing up nominal interest rates is trivially achieved by rising inflation by devaluing currency by printing lots of it and spending it on pretty much anything. It would pretty much instantly hike up the nominal yields on pretty much everything USD-denominated to match the (now) higher inflation. It doesn't mean that it's a good thing to do as it has all kinds of other effects, but in general the governments have the ability to do this should they choose to, it's just that they keep pinky-swearing that they won't do it, making legislation that makes it tricky to do without consensus (but they can repeal that if both parties agree that it's the way to go) etc.

nonbel 7y ago

> Right now, the yield curve is inverted showing how little they actually effect rates. Long run rates are set in the global market. The fed causes the inversions every time by pushing up the short term rates until they are near or above long term... It is ridiculously obvious if you just look at a plot of this.