Inflation has fallen over the last quarter-century, so one would expect to find Treasury yields have fallen, but there is more than just benign inflation at work. The Fed has also been suppressing long-term interest rates, with QE1, QE2, Operation Twist and now QE3.
The yield on 10-year Treasuries is now below the Fed’s long-term inflation target of 2 percent, offering savers a negative return on investment unless they are prepared to take on risk. The Fed’s aim is to induce investors to take on more risk, in the hope that increased capital spending will stimulate employment and lead to a recovery. But they risk leading savers into another disaster, with falling earnings or rising yields ending in capital losses.
Corporations are reluctant to expand and will remain so until they see a sustainable increase in consumption. Fueled by new jobs — not short-term credit. Low interest rates without job growth could cause another speculative bubble, with too much money chasing too few opportunities.
Without jobs, no monetary policy is likely to succeed.
