Sunday, January 23, 2011

The Fed: what can it do?

There are no good options available for the Fed......
There are any number of ways to say it, but it all comes down to the same thing. The Federal Reserve has reached the rock and a hard place position when it comes to the Federal Reserve Rate.

According to the US Treasury, the cost of paying the interest on the national debt was 413 billion dollars in 2010. Despite the fact that our national debt at the time reached 13.5 Trillion, that was not a record, it was barely an effective rate of 3.05%. Just 10 short years earlier, our effective rate on the national debt was 6.19% and the Federal Funds rate was 3.5%.

So by lowering the Federal Funds rate, we cut a like amount off the effective rate of the interest on the national debt. In fact, since 2000, the effective rate of interest on the national debt has fallen from 6.38% to just 3.05%. During the same period, the national debt rose from 5.6 trillion to 13.5 trillion. (Figures based on Sept 30, end of the federal fiscal year).