One component of the leading economic indicators is the yield curve. Bond investors keep a close eye on this, as it illustrates the spread or difference between long-term interest rates and short-term ones.
To finance deficits, the government must sell bonds to investors, competing for capital that could otherwise be used to invest in stocks or corporate bonds. Government borrowings raise long-term interest rates, stifling economic growth.
The FOMC has considerable control over short-term interest rates. We have much less influence over long-term rates, which are set in the marketplace.
Achieving price stability is not only important in itself, it is also central to attaining the Federal Reserve's other mandate objectives of maximum sustainable employment and moderate long-term interest rates.
The insurance companies do not refer to the key policy rate when they send their statements. We can only control that rate. Long-term interest rates are determined largely by global financial markets.
Real short- and long-term rates were relatively high in the late-1990s, so financial excess can also arise without a low-rate environment.
By purchasing and holding large amounts of Treasury securities and MBS, we put additional downward pressure on term premiums and so on long-term rates.
