Summary: Here’s another in my series of economic myth-busting articles, explaining that the Fed is not suppressing rates. It is a follow-up to Ignore The Bond Bears, The Fed Will Not Raise Rates.
Part of the magical, even divine, powers attributed to the Federal Reserve is their ability to set interest rates — both short- and long-term. Since the quantitative easing ended we have seen this taken to the logical extreme — with the Fed suppressing rates without visible action! In physics that’s quantum mechanics. In finance it is mythology.
The Fed is not buying bonds — their most effective (almost the only effective) means of depressing interest rates. QE3 ended on 29 October 2014. Two years ago. On that day total Federal Reserve assets were $4,487 billion. As of 19 October 2016 they were $4,467 billion. See the graph.
In theory the Fed could affect prices by buying and holding a substantial fraction of the $64 trillion in outstanding US debt and loans. Taking the fraction they own from 3% to 6% over 7 years (2008-2014) did not seriously change the bond market’s structure. Perhaps the structure of credit spreads differs from what it might have been if the Fed had not added the Treasury securities and government-guaranteed mortgages. It’s difficult to determine such things. But it the effect on credit spreads, if any, is unlikely to have affected interest rates.
If the Fed is not suppressing rates, why are they so low? Fed Vice-Chairman Stanley Fischer explains in this speech on 17 October.