CNBC’s Rick Santelli and Eugene Fama, University of Chicago, professor of finance, discuss interest rate volatility and when the Fed may pull back on tapering.
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i have a very special guest, one of the winners of the 2013 nobel prize. it’s dr. eugene fama, known by his university of chicago students, good to have you here, and happy to take the time to spend time with us, professor. thank you. my pleasure. listen, as a noted economist, as you look at the qe programs as we embark on a fed meeting, can you tell me your associations about the current program and what you see as potential issues when we get to a point when we have to reverse the interest rate subsidies now imbedded in our markets? sure. actually, i’ve been doing research on that very question for the last six months. i think that what they are doing is — the effects of it are greatly inflated accounts. so what has the fed been doing? well, in 2008, they changed the game they were playing and they started paying interest on reserves. and they’re paying interest on reserves currently, slightly above market rates. now, what that means is reserves are now basically just short-term debt. so what they’ve been doing is issuing a lot of short-term debt, $85 billion a month, and using it to buy back long-term debt. with the goal of lowering the interest rate on long-term debt. now, they take credit for the low interest rates on short-term debt, but, in fact, what they’ve been doing should have raised the interest rate on short-term debt, not lower it. because you can’t do both. if you’re issuing interest-bearing securities to buy other interest-bearing securities, you’re pushing up one rate and pushing down the other rate. what happened? actually, the short rate fell during that whole period. well, when i — you know, professor, when i talk to people that are buying cars, when i talk to financing — financing homes, and, of course, we saw the run-up that started in may in interest rates, all of that was called in to question. i guess a simple question at this point would be — what we’ve seen in terms of interest rate volatility, and then the fed pulling back on tapering, is janet yellen going to ever find the right time, sir? you know, i know your market-efficient work has many issues with it, like the national exuberance. are we going to have an irrational interest rate market dur to the inputs of the fed? no. because i think they are basically neutral events. i don’t think they do very much. they just — so when the balance sheet