Yellen’s Meeting: Lower Interest Rates?

Mar 31, 2023 | Economy

Why Janet Yellen’s last-minute meeting with financial regulators could lead the Fed to lower interest rates.

Janet Yellen, who is the Secretary of the Treasury, recently held an emergency meeting with financial regulators. This meeting led to rumors that monetary policy might be changing. Experts say that the meeting was probably about the Federal Reserve’s (Fed) plan to lower interest rates in the next 90 days. In this blog post, we’ll talk about the QE paradox and how it’s led to banks making money even though the yield curve is upside down. We’ll also look at quantitative easing and how it has changed the amount of money savers can buy. Yellen’s meeting with financial regulators could lead to the Fed lowering interest rates. We’ll talk about what that would mean for the economy and how that could happen.

The QE Paradox

Let’s start with the QE paradox, which is when banks make money even though the yield curve is inverted. We need to look at how banks make money to understand this. Most of the time, banks borrow money for short periods at lower rates and lend money for long periods at higher rates, keeping the difference. But when the yield curve is inverted, the interest rates on shorter-term loans are higher than the interest rates on longer-term loans. This makes it hard for banks to make money.

But the yield curve chart shows that banks are still making money. How could this be? The answer is that the banks’ yield curves are steep, even though the real yield curves are very much inverted. Banks can get money from savers for almost nothing (they pay about 50 basis points on savings accounts) and then lend it out for a long time, making a nice profit. This is because people who keep their money in the bank lose buying power. We’ll talk about this in more detail later in this post.

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Quantitative Easing (QE)

Now, let’s look at quantitative easing (QE) and how it affects people who save money. QE is a type of monetary policy in which the Fed buys government bonds and other securities from banks. This adds to the reserves of the banks. The goal is to get people to lend money and help the economy.

But, as the chart of interest rates for savers shows, QE has hurt the ability of savers to buy things. At the end of 2007, savers were earning about 5% interest, but by 2009, they were only earning 25 basis points. As of 2023, they are getting about 50 basis points, while inflation is around 6%. This means that savers lose about 5.5% of their ability to buy things each year.

Many savers are realizing this and looking for other places to put their money besides banks. They are putting their money in money market funds, where they can earn about 4.5% interest, or in Treasury bills, where they can earn about 5% interest.

Meeting Between Janet Yellen and Financial Regulators

So, how does Janet Yellen’s meeting with financial regulators fit into all this? Experts say that the meeting was probably about the Fed’s plan to lower interest rates in the next 90 days. This would be a big change in monetary policy, and it is likely that the economy would be affected.

If interest rates go down, more loans could be made, which would help the economy. But it could also lead to inflation, which would make savers’ money even less valuable. It’s a fine line, and the Fed will need to think carefully about all the possible outcomes before making a choice.

Conclusion

In conclusion, Janet Yellen’s recent meeting with financial regulators has started rumors about a possible change in monetary policy. Experts say that the Fed could drop interest rates in the next 90 days. The QE Paradox is the fact that banks are still making money even though the yield curve is going down.