This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Fed Doesn't Know What Corporate America Needs

NEW YORK ( TheStreet) -- When conventional monetary medicine becomes ineffective, central banks often resort to a dose of quantitative easing (QE) to stimulate the economy. The Federal Open Market Committee (FOMC), a group within the Federal Reserve, will likely agree to another round of QE in one of its next two meetings. But would it work?

Last month's Duke-CFO survey of 450 U.S. CFOs drilled down to the key driver of growth: investment. We find new evidence suggesting that small tweaks in the interest rate would not have a measurable impact on investment.

While consumer spending represents two-thirds of GDP, the key driver of growth is private investment. Consumer expenditures are smooth. For example, in the horrible first quarter of 2009, real consumer expenditures dropped by 1.6% (annualized). In contrast, gross private domestic investment plunged by 43% (also annualized).

The Fed's main levers are interest rates. The short-term rate is already essentially zero. It is unlikely that the Fed would push the short-term rates below zero. Long-term rates are more difficult to control, but at the last FOMC meeting, the Fed extended its Operation Twist by agreeing to spend $267 billion to buy long-term bonds (to reduce yields and borrowing costs) and finance it by selling shorter-term bills.

There are other options. They might include lowering the 0.25% interest rate the Fed pays banks on reserves to prod them to lend money rather than park it with the Fed. It is possible to purchase other (non-government bonds) assets (in an indirect way), which might lower interest rates on corporate bonds. They might even copy the Bank of England's scheme to subsidize bank lending. But the common logic is that, by reducing the cost of borrowing, investment will increase.

While this logic seems sound, there are at least two reasons why investment will not robustly respond to QE given today's circumstances.

First, the cost of borrowing is already amazingly low. The yield on Moody's Baa rated bonds is only 4.8%. The yield on the highest-grade bonds, Aaa, is only 3.3%. These rates are rock bottom -- we haven't seen levels like this in 50 years. Yet investment has not responded.

It is unlikely that lowering the interest rate a little more will produce any measurable effect.

1 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,959.44 +154.64 0.87%
S&P 500 2,078.54 +7.89 0.38%
NASDAQ 4,781.4240 +16.0440 0.34%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs