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Will the Federal Reserve Pay You to Borrow Money?

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April 28, 2009 – Comments (0)

As strange as that sounds, many moons ago I mentioned that the Fed, led by Ben Bernanke, would love nothing more than to pay people to borrow money and a study released yesterday proves I was right.  The fact is that Big Ben wants inflation so bad that he would be willing to pay others to borrow money if he could actually do that. 

The study that was released yesterday morning stated that the Federal Open Market Committee (FOMC) was presented with the suggestion that the optimal interest rate would be –5%.  That’s right, supposedly the best interest rate would be to pay others 5% to borrow money, despite the fact inflation is near 2%, so the net loss on money lent would be around 7%.  That’s OK though, they don’t have to take the loss, they just pass it on to every American with increased taxes down the road.  Oh, and don’t be naive, those higher taxes will be coming, it is just a question of when.

Nevertheless, since the Feds know that they cannot go negative and they are already sitting near zero percent, they recommend keeping up, even stepping up, other unconventional policies that have the same effect as negative interest rates, such as the announcement of the stepping up of MBS (mortgage backed securities) purchases to $1.15 trillion.  The research the Fed was acting upon actually suggested an even greater amount, but the Feds decided to play it “conservative” as one Fed governor defined it.

Why am I bringing this up right now?  Easy, the FOMC is meeting again as this is posted so be prepared for more of these "unconventional” policies to be released.  What worries me is that Big Ben himself already stated that inflation will be an issue after the next FOMC meeting, so we are likely in for a shock as the Fed makes their announcement tomorrow.  There is even talk that the Fed may up their MBS purchasing yet again.  Remember that the Fed’s Policy Statement has a much greater impact on mortgage rates than their actual decision, so I will give you a rundown once it is released tomorrow at 2:15 over at Florida Mortgage Report (www.flmortgagereport.com).

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