Posted by: garispang | November 6, 2009

Risk Is More ‘Enticing’ Now: Chief Economist

Earlier this week, the Federal Reserve kept its federal funds rate unchanged in a range of zero to 0.25 percent, and said the economy “continued to pick up” since its last meeting.

Robert Barbera, chief economist at ITG, shared his insights on how the Fed statement impacts financial firms and the economy.

“Six months ago, the question was: The fund rate is already zero, can you invent a strategy that allows you to resuscitate the financials, banks and the like?—And I think the alphabet soup did that,” Barbera told CNBC.

He declared that the buying of Treasurys and mortgages “worked.”

“And when I say worked, the name of the game is supposed to be, you reflate the financial system—risky asset prices go up, risky interest rates come down, and then you restart the economic engine,” he said. “And without the ability to take the fund rates down, it wasn’t clear how you were going to do that—but [the Fed] did.”

Barbera said as long as interest rates stay near zero and as long as investors continue to debate whether the economy is self-sustaining, there’s downward pressure on Treasury interest rates—and taking risks becomes more “enticing” for investors.

“And that is the nature of what easy money is about,” he said. “You keep the short rates low, and you try to get lenders back in to risky lending.”

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