The Fed has clearly stated its policy regarding the Federal Funds rate with each monetary statement
"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Let's take a look at other rates which are less controllable by the Fed as witnessed by changes since August 2 when hints of QE began surfacing.
- 1 Month: gained 1 bp (basis point)
- 6 Month: gained 2 bp
- 2 Year: gained 21 bp
- 5 Year: gained 63 bp
- 10 Year: gained 67 bp
- 30 Year: gained 67 bp
So the shorter end of the curve the Fed has managed to keep rates low but as you move further out on the curve rates have clearly moved up in the face of a monetary policy intended to keep rates low. If you remember when Bernanke gave his 60 Minutes special he clearly says at 6:45 in the video – "What we are doing is lowering interest rates…"
Clearly QE in the eyes of the Fed is not working and they know that. They have shifted the bar of success to equity performance but don't lose site of the Fed's failure to achieve a low interest rate environment for an extended period. They have in fact lost control of the yield curve beyond one year.
- Recently Fitch issued a report that 30% of commercial real estate that needs to be rolled in 2011 do not meet their standards.
- Residential mortgage is negatively impacted by rising 10 year yield.
Regardless of what Bernanke may say publicly about the success of QE they understand its failures and they understand the extreme negative impact rising interest rates will have on future growth, bank balance sheet risk and credit formation.
Listen to Bernanke in the video below discuss employment. He's very concerned and this was only two months ago. Either QE is going to occur for the 4-5 years he says it will take for unemployment to come down to acceptable levels or the Fed will be looking for a way to save face while exiting future QE. If this move in rates continues, the bond market may very well set future monetary policy and NOT the Fed.
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