The Fed got it really wrong. Flattening the yield curve may encourage borrowing, but by reducing revenue to the banks, it also reduces the incentive to lend.
The Fed is currently paying banks about $4 Billion per year to maintain excess reserves. At the same time it's depressing short term rates to near zero, it pays banks 25 basis points to avoid lending and to hold cash.
The market response speaks volumes about the wrongheadedness of this decision.
Here's a link to an article on yesterday's Fed fiasco. It gives the exact reason I was so disgusted with the outcome of the Fed meeting. The twist is likely to reduce, in the net, bank lending after all factors are taken into account. It's particularly damaging to the economy when employed along with a 25 basis point interest rate on excess reserves.
The Fed has a dual mandate; to achieve maximum employment with price stability.
I remember reading Fed economic forecasts in 2007 in which they had growth at over 2.5% as far as the eye could see. A decline in the housing market was specifically forecast to reduce GDP by about 1%. The fact is that they failed to abide by their mandates by allowing real estate inflation to go wild, with the excuse that housing cost was accounted for in owner's equivalent rent. They failed to realize the fallacy of looking at housing costs in that manner. It's the equivalent of judging the cost of all energy sources by looking only at the cost of natural gas.
No interest should be paid on excess reserves. Prior to October 2008, no interest was paid on either required or excess reserves. This is a Bernanke invented means to help alter monetary policy, but has never been employed. Please note that the duration of this program corresponds exactly to the current period of economic malaise.
The FED has done all they can do maintaining the low interest rates. Thank you FED...now stay the hell out of it and let America do what it does. I find it fascinating how investors react so harshly to government rhetoric. When it comes to financials, it seems that our government has trouble balancing their own budget and in my opinion a 12 year old can balance a budget. The government needs to focus on the basics and let America turn itself around. Stimulation mixed with fear is volatile in a biological and economical setting. It seems that everytime the dust settles, the FED just gets it sturred up again. A fast solution will never last for any length of time.