More on Bernanke’s seemingly willful effort to talk up long-term rates with his tapering speech this summer? It seems clear he wanted a steeper yield curve, with longer-term rates up by about 1/3 versus last year. Two potential explanations:
- He Wanted Higher Bank Profits (almost certainly true): The Fed cares about the economy, but it cares a lot more about protecting its turf. And its turf is the health of the banking system. Banks lend at longer-term rates and borrow at shorter-term ones. The bigger the gap between long and short-term rates, the more money the banks make. With banks still extending and pretending on their true financial health, the Fed just gave them some relief.
- He Wanted More Bank Lending (less likely true, but genius if it is): As we have all learned over the past few years, low rates are meaningless if the banks don’t actually lend at them. A steeper yield curve, offering higher profit potential, gives banks more incentive to lend (vs. parking reserves at the Fed). Seen in this light, it could be a genius move to re-start the monetary circulatory system. The ghastly drop in monetary velocity shows the system is still seized up post-crisis (velocity = basically how fast money circulates: chart below). Maybe a steeper curve and the prospect of higher profits is the jump-start we need to get things flowing again.
Sorry about the Lame Yield Curve Chart. The US Treasury has lovely charts, but offers no way to download them. We just can’t have the Government competing with private sector data providers (delivering data produced with our taxpayer dollars…). That would be socialism! (grin)
