How about quantitative easing?
You kind of answered that below. As I understand it, the entire purpose of the Federal Reserve buying Treasury Bonds was to inject money (cash) into the economy at large. Holders of Treasuries, as you may be aware, run the gamut from international central banks to pension funds to mutual funds to insurance companies to individuals. Lots of different entities see US Debt paper as a safe haven because it is an EXTREMELY liquid security (trades settle "same day" as opposed to "trade plus 3" with most other securities) and for the most part, if you hold a Treasury bond for even just 6 months, long enough to collect a coupon payment and then sell, you very rarely lose money, if ever. But if you are holding that paper, you aren't holding cash. And cash is king, as they say. The Fed was trying to goose an economy that was on its knees. It seemed to work. Keep in mind that it does not matter WHO holds the paper, the Treasury still pays the interest, so the Fed gained interest payments on all the bonds it bought while it held them. They must, by law and charter, return that money to the Treasury, BTW. They don't get to keep the interest payments as profit.
And doesn't changing the Fed Funds rate affect other short term debt
Absolutely. The Fed Funds Rate is that rate the Federal Reserve charges member banks for loans, and these loans are usually VERY short term - 90 days or less, often simply overnight. But yes, when a bank has to pay more to get cash, they charge more to lend it out, but that effects loans, not Treasury Debt. I'm talking credit cards, mortgages, auto loans and other secured and unsecured lines of credit.
When the Fed Funds rate changes, it seems like other short-term interest rates follow, and intermediate rates too to some extent.
Yup. When the Fed funds rate goes up, so does the rate on your Visa and the next mortgage or car loan you seek.
(On edit to add, that I am actually looking to buy a new(er) car this week precisely because I fear auto loan rates are going to rise)
And I thought quantitative easing (where the Fed buys trillions in treasuries and agency bonds) is meant to push up the prices (and thus push down the yields) of these and similar bonds.
The bond market reacts to supply and demand just like anything else. When the Fed started buying this paper at a rapid pace, it put demand on the market where there was none (or not as much, anyway) before. So the prices for an individual bond went up, and yields fell. If you can go back to late summer 2007 you would find that the 30 year Treasury had a coupon of 5 to 5.5%. It's currently 3%. That's $30 a year on every $1000 par value bond. But what was more interesting in my mind is the "curve" of the yields and coupons across the maturities. Back then it was something like 30 year = 5%, ten year = 3%, 5 year =1.5 to 2% and so on, a definable curve. Now it has flattened to the point that a 2 year T-Bill is paying 2% and the thirty year is only one single percentage point higher! This is good for the Treasury but sucks if you are looking for interest payments as an investor in these securities.
So yes, the whole Quantitative Easing policy most certainly had the effect of increasing prices on currently issued bonds and forcing down yields.
::: I want to make a point here about how Treasury bonds are priced; When the Treasury Auctions off new debt paper, the coupon, yields and prices for the individual bonds of the various maturities offered for sale are set at an auction, the participants being the
"Primary Dealers". If the dealers feel they can not sell 30 year paper at a 3% coupon anymore, it will get bid up at the next auction, but for the most part, the actual price or cost of one of the bonds stays pretty close to $1,000.00 a piece. It is in the secondary market where the price will vary to a larger degree.
::::
Goal: to push interest rates down or keep them from rising, or rising as much as they would otherwise. To prop up the economy.
Which it pretty much did, wouldn't you agree? Keep in mind that one of the most serious issues facing the financial industry in late 2008 is that banks stopped lending to each other. No one could trust anyone else to pay back money they borrowed. If the Fed hadn't stepped in and done what they did and continued to do so until they stopped, the great recession may very well have turned into a second great depression we would still be trying to climb out of. I once heard an apt description of the difference between a recession and a depression.;
A recession is when an economy is brought to its knees.
A depression in when an economy has been knocked flat on its back and can't get up.
Or is all this just kabuki?
If Kabuki is an economy, then yes! But no, it isn't theater, not by a long shot.
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