By Jonathan B. Wight

A number of politicians and pundits blame the Fed for all the ills of the world. A small part of this might be justified, because it’s certainly true the Fed has deliberately caused some recessions and contributed to creating some bubbles. And the Fed’s reluctance to regulate new financial instruments under Alan Greenspan may have also contributed to the severity of the moral hazard problem with financial markets.

But the big attacks on the Fed, insinuating that it created the last housing bubble by lowering mortgage rates, or that it is despicably holding down the earnings of senior citizens living off fixed income bond earnings, are both looney.  What then could explain this chart below?  

The Fed can’t control the 30-year mortgage rate.  The Fed can control the overnight rate (the federal funds rate).  These two rates are related, but there are more than $30 trillion in bonds outstanding; the Fed owns assets worth $4 trillion.  Can the tail wag this dog?—I don’t think so, especially not at longer maturities.

The reason the 30-year rate has fallen coincides with the rise of global finance, the opening up of our borders to massive capital inflows, and foreigners' willingness to lend long in the market, pushing down the 30-year rate.  Need the data?—read Ben Bernanke’s speech way back in 2007 prophesizing about this. 

Global finance is pretty much now an unstoppable force.  The Fed has no power to prevent capital flows into the U.S., even if it magically wanted to force up long term bond interest rates to satisfy retirees!  Can’t do it, even if they wanted to!

Chart source: http://www.chartoftheday.com/20160302.htm?H