What is the Federal Reserve's rationale for such low rates?

This is the same Fed that stood on the sidelines when the bubble was growing and DID NOT ACT. They are now saying there is no real estate bubble but there clearly is. Unfortunely they are creating real estate bubbles in countries out side the US by forcing lower rates especially by dropping the dollar. Can we have confidence in this FED ? What bothers me is the Fed dropped rates with 9/11 to avert a total collapse but should we have another attack he does not have a lot of room. He is basically in a corner. Also I must admit if you live outside the US as I do, the positive attitude towards the improving economy there is hard to "FEEL"

 

Do you think someone has a whiff of some negative Fed speak since we are selling off ??

 

taodr wrote

They are now saying there is no real estate bubble but there clearly is

Wasnt it Greenspan who admitted after the stock market bubble had burst, that it was was impossible to tell whether there is a bubble or not untill after it has deflated (or words to that effect).

Me thinks they dont know what the F' is going on anymore!

 

they are just extending the bubble..

deflation is the symtom ,not the cause..

money is just numbers, these days, just a 0 and 1 in computers..
even the stock market is just a logical construt

the problem is the REAL economy, overcapacity, under-consumption, dual defecits, competitiveness..

moving around numbers doesn't solve these issue...

 

http://landru.myhome.net/monques/moneyfacts.html#MONEY

SUBCOMITTEE ON DOMESTIC FINANCE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
88th Congress, 2nd Session
SEPTEMBER 21, 1964


WHO DETERMINES THE MONEY SUPPLY?
93. Who appoints members of the Federal Open Market Committee?

Seven of the nineteen members of the "discussion" Committee are appointed by the President of the United States and confirmed by the Senate of the United States. Their term is 14 years. The other 12 participants at Open Market Committee meetings are elected through votes of private commercial bankers; specifically, they are the presidents of the 12 Federal Reserve banks, elected to their posts indirectly by bankers from banks which are members of the Federal Reserve System.

94. What are the most important Open Market Committee powers?

The Open Market Committee has the power to determine the Nation's supply of money and credit, and therefore, the general level of interest rates, among other things.

95. How does the Federal Reserve influence interest rates?

By open market operations, and by setting the required reserves of member banks, the Federal Reserve determines the amount available for lending. This together with the demand for loanable funds is the heart of the market for money that sets interest rates. In addition, by open market operations, the Federal Reserve can effect the level of interest rates on Government bonds. And finally, the Federal Reserve influences expectations about interest rates.

96. Why is the Federal Open Market Committee one of the most powerful groups of men in our country?

Because in many ways their power is equal to that of the President in deciding how the world's greatest economic mechanism will operate. By regulating the supply of money, the Committee can control the general level of interest rates. This in turn is one of the major determinants of the level of business activity in the country. The Committee, then, has the power to offset any action taken by anyone to stimulate or restrain the economy. This indeed is power.

97. Are current open market operations what the founders of the Federal Reserve System intended?

No. It was expected that in monetizing "eligible" short term commercial paper, the Federal Reserve would provide sufficient liquidity to sound banks in periods of need (or restrain excessive credit expansion). While the Federal Reserve was expected to exert supervisory powers, it was expected that the money supply and interest rates, would be fully responsive to business conditions. Thus the discount rate, rather than open market operations was regarded as the Federal Reserve's most important tool.

98. Why was the discount rate regarded as an important regulatory tool?

Because under the original Federal Reserve arrangement, no specific limits were placed on the amount of money the system could create. After all, if the banks had eligible paper to rediscount, then the regional bank would automatically create reserves. This raised the possibility of infinite money creation provided the banks' lending rates and the system's charges were in a fixed favorable relation. But if the system could control the discount rate, it could discourage rediscounting or borrowing from it simply by raising its discount rate high enough. At a high enough rate, the commercial banks would find no businessmen willing to borrow. Thus the supply of eligible paper available to the commercial banks would dry up and, in turn, the commercial banks would be unable to acquire more reserves by discounting. The automatic system then had a regulator; namely, the discount rate.

99. Is eligible paper discounted much today?

Very rarely.

100. Why have open market operations replaced discounting as the most important means of regulating the money supply?

Basically, because the Federal Reserve found open market operations a more sensitive tool to control the money supply. And through the years the Federal Reserve has decided that its responsibilities were not consistent with the authorization of an automatic money supply.

101. Precisely what does the Federal Open Market Committee do?

It determines the amount of government securities the Federal Reserve will buy and sell, in order to influence the level of bank reserves. In essence, the Committee determines U. S. monetary policy.

102. What functions have been left to the regional banks?

Now that discounting eligible paper is rarely used, the regional Federal Reserve banks clear checks and gather statistics and other economic data.

103. Have the intentions of the founders of the Federal Reserve System been altered by the turn to open market operations?

Yes, when the System was originally founded a struggle was waged over who would control the Federal Reserve—public or private interest. The solution was a compromise. But what (in 1913) was the master switch governing the money supply—the discount rate—was left in the hands of a totally public body—the Federal Reserve Board in Washington. This was a deliberate act. President Wilson rejected the notion of diluting the public nature of the Board when he said, "Which one of you gentlemen would have me select the presidents of railroads to be on the Interstate Commerce Commission to fix passenger rates and freight rates?"

But when Congress in 1933 and 1935 authorized the Open Market Committee, which in effect succeeded to the policymaking role of the Board, it gave private interest a firm foothold in determining monetary policy—the money supply and the general level of interest rates. Five of the twelve voting members of the Open Market Committee are regional bank presidents. These men hold their offices through the votes of bank directors, two-thirds of whom are elected by private bankers. The other seven bank presidents, of course, participate in the discussions of the Open Market Committtee. The upshot is that men whose views must meet the test of the private bank-selected directors help determine the Government's monetary policy. A purely public group has given way to a mixed body with questionable qualifications to represent the public interest.