[JamesBarney]

They can, they just don't have a direct tool for doing it. Long term rates are just an aggregation of short term rates over a given time span. So they can adjust long term rates via promises and hints that they will keep short term rates low for a long time.

There is a ton of interesting monetary theory about how the Fed can do this and issues they run into.

[jnordwick]

long term rates are more than short term rates added together. while related, short term rates are much more driven by central bank reserve and regulatory policy, and long term rates much more driven bvy return and inflation expectations.

In a real dollar sense, the fed has zero ways to affect long term rates.

[JamesBarney]

Sure there are other factors that affect long term rates. But if the Fed came out tomorrow and said "We promise to keep interest rates at 0 for the next 10 years" long term rates would drop considerably wouldn't you agree?

[jnordwick]

Not at all. Inflation expectations would soar. A few years ago and there talk was that keeping the overnight rate would lead to huge inflation issues. Now a strange narrative is appearing that nominal interest rates are simultaneously too and inflation going higher.

And there is no way they would be to keep that rate. They can say whatever they want, but that doesn't mean the overnight rate has to oblige them either. They only set a target, the actual rate is still determined in the bank to bank market and historically it does diverge, sometimes strongly.

[skybrian]

I'm curious, why can't they manipulate it directly? It seems like if a central bank bought enough long-term bonds, supply would drop enough to raise the price?

[pas]

The opposite. If they buy every long term bond that means that companies (and the Treasury too), can put them up for any price, let's say zero coupon payment, that's a zero yield bond.

No, to drive up rates would mean to restrict the buyers from buying (either via restricting the money supply - that means a combination of raising the overnight repo rate [FFR - Federal Funds Rate], raising reserve requirements, decreasing interest payment on reserves).

But such a move means slowing down regular lending, VISA/MasterCard and the banks would have to increase consumer facing prices of credit, etc. It would slow down wage growth.

And we are not seeing wage growth, we're not seeing inflation.

To stimulate spending/consumption all the Fed can do is absorb more and more risk (buy bonds/assets - quantitative easing, keepr rates low, encourage lending, encourage the starting of new projects).

Why people are not starting new projects?

Well, for example look at NIMBYs, look at how Congress doesn't want to force mandate better EPA regulations, look at how municipal fiber plans were stopped thanks to Comcast lobbying, etc.

Basically a lot of money goes into "rent" instead of innovation. (Asset bubbles.)

[MR4D]

My guess is because the amount of Treasury bonds would dwarf what the fed can buy.

In other words, the Treasury dept is the one that has more power here.