Friday, March 27, 2009

Monetary Policy in the Real World

I know I harp on this a bit, but too many candidates fail to see the real-world importance of what they're studying for the exam. I was teaching a Series 65 online class the other day, talking about monetary and fiscal policy, hoping I could tie it to something going on in the news. Boy, did I get lucky! Just after I told them that the FOMC can purchase Treasuries to help a faltering economy, I found the following news item at

Fed to buy up to $300B long-term Treasury bonds WASHINGTON – The Federal Reserve announced Wednesday it will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt. At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most — if not all — of next year. Fed purchases should boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt. The last time the Fed set out to influence long-term interest rates was during the 1960s. The article didn't mention "fed funds rate," but it hinted at it with "a key short-term bank lending rate." As always, you have to be patient and flexible when studying the test material or the real world version thereof. Try to see the Series 65 connection in the Jim Cramer show, the morning newspaper article, maybe even the late-night comedian's monologue. The FOMC is purchasing Treasuries, which will lower their yields and probably help push down mortgage rates. It's not just a bullet point--it's going on right now. Amazing.

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