The most interesting development in today’s FOMC announcement came from the details released by the NY Fed. Specifically, they noted that they will focus on shorter duration bonds via the new QE program. The ten year yield is surging on this news to 2.62%. The five year is tanking to 1.12%. This is very odd because short rates are already very low. There’s really no need to focus on shorter bonds if the Fed is truly trying to stimulate loan growth. If the Fed is intending to reduce borrowing costs and really generate an economic impact they should be targeting long bonds – the bonds that home loans and most auto loans are based on. If the Fed were trying to target households via this program they would have targeted the 7-10’s and 10-17’s. But their focus is in the 5-6 range.
Of course, one of the unintended consequences of QE is that recent expectations of long dated maturities purchases is driving down the yield curve and negatively influencing net interest margin at banks. Unless I am missing something (which could very well be the case) it appears to me as though Mr. Bernanke is trying to keep the curve steep. In doing so, he is directly communicating to us all that he is not worried about reducing our borrowing costs, but is instead worried about keeping the bank net interest margins intact. QE2 was never intended to boost Main Street. It is entirely focused on helping the banks. Mr. Bernanke continues to believe that he can generate economic recovery if he gets the banks back to full strength.