Interest Rate - Viet 1 Viet Hoang Dr. Spencer Economic...

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Viet 1 Viet Hoang Dr. Spencer Economic 2301-002 03 May 2009 Interest Rate When the Federal Reserve System announced the news about its new proposal of long term borrowings, a lot of comments were raised discussing about its advantages and disadvantages. According to an article in Fortune magazine, “Pain Now, Pleasure Later”, reporter Allan Sloan gave us the briefly idea of his opinion about this plan. Before this announcement of the Fed, we were familiar with the short-term borrowings package which was very low. We only have 0.2% interest for 30 days borrowing Treasury, and 0.4% interest for six months borrowing Treasury (Sloan). That kind of interest was low; nevertheless, a lot of investors still bought it due to its safe quality – they could always get their money back without being afraid of losing their money when the banks they had made deposits into went bankrupt. In the need of money to revitalize the bad economy right now, the Fed gave out the long- term Treasury with the higher rate of interest but with pretty long time of holding people money – up to 30 years with the interest of 3.6% per year (Sloan). By increasing the interest rate for this long-term Treasury to make people feel they take advantage over the inflation, the Fed wanted to attract more people to buy more Treasuries so they could collect more money in order to recover the hurting economy. However, there was a small but not impossible chance that the Fed will not gather enough buyers such as the British Treasury did, and their currency would lose the top place. On the other hand, the long-term Treasury (30-year T-bond) is more convenient than short-term Treasury in the way we rollover it – 30 years rollover-free compare with just one or 6 months rollover (Sloan). So there is a confident result that the Fed will have the great amount of people buying the T-bond. Plus, there is a positive chance that the short rate will boost up to 4% and the long-term Treasury up to 7% in next few years (Sloan). Other idea that Sloan mentioned was China’s way to keep their currency as low as
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This note was uploaded on 03/27/2012 for the course ECON 2301 taught by Professor Staff during the Spring '08 term at Texas A&M University, Corpus Christi.

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Interest Rate - Viet 1 Viet Hoang Dr. Spencer Economic...

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