Defining Stimulus Grows More Elusive: The Ticker

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By Caroline Baum

It's the day after, and the yield on the 10-year Treasury note is lollygagging around 1.7 percent, an all-time low.

Hold off on that victory lap just yet. For those who believe the shape of the yield curve has relevance for the economy, the Federal Reserve's entry into the twisting arena looks to be counterproductive. After all, the Treasury is extending the average maturity of its debt at the same time the Fed has committed to buying $400 billion of notes and bonds maturing in six to 30 years by the end of June 2012.

The bigger concern is that the spread between a Fed-pegged or influenced short-term rate (the funds rate or the 3-month T-bill rate) and a market-determined long rate reflects the stance of monetary policy. Steeper equals easy. Flatter or inverted equals tight.

As Scott Sumner, a Bentley University economics professor, writes on his blog: "The only thing that’s 'twisted' is the Fed’s logic. They are so obsessed with the Keynesian low interest rate approach to stimulus that they’ve completely lost their bearings and ended up tightening monetary policy."

I would change that to "the Keynesian low long-term interest rate approach." There is nothing magical about long rates. Borrowers have options. Potential homeowners can choose from a menu of adjustable-rate options, assuming they can qualify for a loan.

The obsession with long rates reminds me of something an economist friend, now deceased, used to say on the subject. If long rates are so important, why does every central bank in the world target a short-term rate?   

(Caroline Baum is a columnist for Bloomberg View.)      

-0- Sep/22/2011 19:06 GMT