Thursday, August 26, 2010

Fed term operations and Nyquist sampling rates

My policy tool says the Fed should target the two year rate to be 1-1.5%. It should get there by bidding one year bill rates. Why?

Because Nyquist tells me that most of my signals will be detected at two years, where they get partial integration. Investors will know this, and much of the Kelly betting goes away.

Why two years?  Because terms at faster transaction rates are dormant.
Why 1.5%? Two year inflation swap rate.
Why not keep rates unusually low for a period?  Fraud  causes cycles.

What if real growth rates suddenly change for the better?  Not the Fed's fault, the Fed just points to the observed  low hanging fruit, at the operational short end.

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