At the Federal Open Market Committee’s two-day meeting last week, with the Federal Funds rate already near zero (ranging between 0% and 0.25%), the Fed effectively ran out of bullets. The market responded with a rise in the three-month Treasury bill rate, which more than doubled from 0.11% to 0.24% in the wake of last week’s troubling Treasury auction. Despite the fact that short-term rates doubled last week, the Fed hinted that it would consider buying long-term Treasury bonds to monetize some debt, which is a fancy way of saying that they would print more money.
The 10-year Treasury bond yield bottomed at 2.08% on December 18 and has risen to 2.87% at the end of last week. I believe it will continue rising as the federal budget deficit grows and the Treasury auctions continue to grow to an unprecedented size. Whether the Fed can print trillions of dollars is uncertain, since the Fed is entering uncharted waters. Last week’s rising yields on Treasury securities was just a preview of what will likely happen as the budget deficit balloons.
This is not only the only plan that the Fed is considering. The Fed is also getting ready to launch a new program to make it easier for consumers to get credit cards and vehicle loans. Just like the Fed rescued the commercial paper market, the Fed now wants to revive credit cards and car loans that have been frozen for over five months. To do this, the Fed would encourage investors to use the Fed as a cheap bank by offering below-market loans for credit card debt and vehicle loans.
Overall, the Fed is clearly overwhelmed by too many financial crises happening at once. The Fed has their hands full as they continue to venture into uncharted waters to fix so many credit crises.