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With Rates Near Zero, What Will Fed Do Next? (Buying long term treasuries=printing money)
cnbc/reuters ^ | 1/25/09

Posted on 01/26/2009 7:09:49 PM PST by sickoflibs

The Federal Reserve is struggling to explain its plans for pulling the U.S. economy out of recession as it resorts to unorthodox policy tools while official interest rates are set near zero.

Since a rate-setting meeting in December, several U.S. central bank officials have tried to lay out what the Fed can do now that it has run out of conventional ammunition to support economic growth.

Usually, the Fed can focus its policy message around its interest rate target, but with federal funds already close to zero that capability has disappeared with no clearly discernible substitute on the horizon.

"It is very difficult to communicate the nature and effects of unconventional balance sheet actions," Glenn Rudebusch, associate director of research at the San Francisco Federal Reserve Bank said in a report earlier this month.

Rudebusch suggested the Fed needs to explain what it hopes to achieve with its various new programs to ease conditions in specific credit markets.

The Fed's next chance will come on Wednesday, when its policy-making Federal Open Market Committee issues a statement following two days of deliberations. It will be the FOMC's first meeting since it cut the overnight federal funds rate to a range of zero to 0.25 percent in mid-December.

Some Fed watchers expect a commitment to buying long-term Treasuries, word on an expansion of the efforts to buy securities in other asset classes, or even setting of an explicit inflation target as as a way to tackle worries about deflation.

Still, the reactive nature of many of the Fed's moves since 2007, with programs seemingly created on the fly as fresh crises erupted, has made crafting a clear policy message more difficult, and also devalued the currency of the FOMC statement.

"The Fed has been making up plays at the line of scrimmage, rather than taking them from a playbook," said Brian Fabbri, economist at BNP Paribas in New York. "Thus the relevance and drama of the FOMC meetings—where the markets would anticipate and react to each change in the Fed's target rate—has been reduced."

Helicopter Days

The Fed is now providing huge amounts of liquidity and credit to various segments of the private sector, massively expanding the size of its balance sheet in what Chairman Ben Bernanke terms "credit easing" policy.

It has attempted to distance itself from Japanese-style "quantitative easing," when the Bank of Japan in the early 1990s set an explicit numerical target for reserves, and expanded reserves accordingly.

"The Japanese experience suggests that simply expanding bank reserves—even by a very large amount—had little effect on bank lending or on the economy more broadly," Janet Yellen, San Francisco Fed President and an FOMC voter this year, said on Jan 15.

Still, the Fed risks a communications gap because its "alphabet soup" of programs can not be be distilled into a simple message on its policy bias—easier, tighter, or no change—or easily measured for signs of success.

Chicago Fed President Charles Evans has defined the Fed's current actions as a proxy for doing the impossible, or setting the fed funds rate at a negative level.

"The trick, no doubt, would be to print exactly the right amount of money to fix today's economic problems without generating another disaster via hyper-inflation," said Rory Robertson, interest rate strategist at Macquarie Bank in Sydney.

But fine-tuning policy around a theoretical negative funds rate is tough, as then-Fed governor Bernanke acknowledged in a now-famous 2002 speech on deflation.

"Alternative policy tools ... may raise practical problems of implementation and of calibration of their likely economic effects," Bernanke said.

Bets in the derivatives markets suggest the Fed could start lifting interest rates as soon as September. Many forecasters look for a much longer spell of near-zero rates, given their gloomy economic outlook.

Jan Hatzius, economist at Goldman Sachs, said that by the end of 2010 conventional monetary policy drivers such as the Taylor Rule, which suggests appropriate adjustments to interest rates based on factors such as inflation and the jobless rate, would imply a fed funds rate of negative 6 percent.

"Our forecast of a 9.5 percent unemployment rate by late 2010 implies the largest amount of slack of the postwar period," Hatzius said. "Fed (and Treasury) officials will need to expand their efforts to stimulate demand dramatically further."


TOPICS: Business/Economy; Extended News; Government; News/Current Events
KEYWORDS: economy; recession; schifflist
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To: Chet 99

Yep—just make sure it’s not just in one bank. I do have some gold/silver coins (small amount) as a hedge to runaway print inflation with new, larger denominated bills. I really don’t think they’ll even attempt that route as it would mean the gov’t bond would likely soar to 20-25% interest (at least) which would crush the rest of the economy that revolves on debt (corporate, commercial real estate, student loans, mortgages, etc).


21 posted on 01/26/2009 9:39:08 PM PST by rb22982
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To: sickoflibs
Has the Fed become a part of the government all of a sudden?
22 posted on 01/26/2009 10:08:15 PM PST by Cheetahcat (Osamabama the Wright kind of Racist!)
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To: sickoflibs

How many of you know that the Fed now has on its books ~33& crap securities that it got from crap firms (banks& Wall St) and gave them (swapped) Treasuries?

Until this episode the Fed only has US Treasuries in its holdings


23 posted on 01/26/2009 10:44:19 PM PST by dennisw (Meshuggah Muhammad put the following words in the mouth of his sock puppet deity...................)
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To: sickoflibs

How many of you know that the Fed now has on its books ~33% crap securities that it got from crap firms (banks& Wall St) and gave them (swapped) Treasuries?

Until this episode the Fed only has US Treasuries in its holdings


24 posted on 01/26/2009 10:44:51 PM PST by dennisw (Meshuggah Muhammad put the following words in the mouth of his sock puppet deity...................)
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To: rb22982
The fed cannot inflate enough without sending treasury yields soaring... Sorry—deflation over the next 5 years is about 95%+ likely. The fed is almost out of bullets. They only have 2 left and only one of which could work — buy US Gov’t long bonds. The next is printing but there are a lot of issues there—even if they ran the presses 24/7 on nothing but $100s they couldn’t hyperinflate with the wealth, job, and wage destruction going on right now. We’d have to introduce like $1000s, $500s and $250s to even think about hyperinflation right now. Unless you can push wages and demand up and reignite the credit bubble we are on the path to deflation—just like during the great depression. As was posted by Mish in a rebuttal to Schiff, the money supply soared ridiculously in 1931 also but was followed by the worst deflation in the history of the US.

I go along with the deflation scenario.
Deflation only just got here and has a few years to play out, to run its course after 25 years of inflation ever since Paul Volker eased up on his clampdown which back then was called disinflation. But was a Fed imposed deflation to reign in the Jimmy Carter inflationary episode
Martin Weiss has lots of good rationales for being in the deflation camp. Mish and Roubini are also deflationists

But right now there is an inflation blip with gold, natural resources stocks and crude up and the USD down

25 posted on 01/26/2009 11:02:26 PM PST by dennisw (Meshuggah Muhammad put the following words in the mouth of his sock puppet deity...................)
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To: dennisw
My scenario is a battle between the two. Deflation has the upper hand right now, but inflation is going to manifest as a psychological phenomenon (bubble) like it did last winter and spring. The "wage push" part of inflation is dead of course, but the "use it or lose it" part will come into play. But there will also be borrowing to bid up commodities once the psychology changes.

Last but not least, the deflation in credit has not translated into broader deflation. There are few price drops other than energy that was way overpriced and has now undershot.

26 posted on 01/27/2009 3:49:34 AM PST by palmer (Some third party malcontents don't like Palin because she is a true conservative)
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To: rb22982
RE :”Stocks went up from 7500 to 9500 with the stimulus. It already had it’s bump. “

What about if Asian investors see the fed buying long term treasuries with printed money to create inflation, as this article says, and start selling treasuries and dollars?

Democrats are proposing, even the stimulus plan, many structural inflationary measures on top of the fed printing money and huge deficits. These will make it harder to deflate in the next crash. Just like health care prices cannot deflate now. Or even many food prices, all government controlled.

Anyone who bought oil in 2007-2008 was taking a high risk. I heard predictions of even greater gains but ignored them. fast run ups scare me. But at these lows oil, grain, rice, all those commodities are pretty much guaranteed to make big money in a few years.

27 posted on 01/27/2009 4:49:27 AM PST by sickoflibs (Obama : " We need swift immediate action on my 10 year government spending plan")
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To: sickoflibs
The Third Bank of the United States is about done.

It's time for the People to reassert their authority. Four years is a long time to wait, and that may turn out to be impractical.

28 posted on 01/27/2009 4:51:29 AM PST by Jim Noble (Long May Our Land Be Bright With Freedom's Holy Light)
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To: sickoflibs
Rudebusch suggested the Fed needs to explain what it hopes to achieve with its various new programs to ease conditions in specific credit markets.

It's rather simple, really - the Fed is now trying to push a rope.

29 posted on 01/27/2009 4:51:37 AM PST by dirtboy
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To: Myrddin

RE :”Did you notice the unemployment rate went up immediately after minimum wage was raised and unemployment benefits were extended? “

That should be obvious. If also keeps deflation from correcting the market and making america more efficient. A drop in prices including labor could be very good long term. Democrats always moan about high prices , but want them to increas windfall taxes and incomes taxes.

Watch the dems on this plan. At the same time they say it has to pass immediately because of job losses, they are defending it admitting, it doesnt really create jobs, that it is a New Deal giving relief to those in distress. But it’s not called the ‘relief’ bill. Dems want a bad economy as long as they can get away with passing the blame. In fact what if they can have a forever bad economy with a majority voting block on the gov payroll, and unions?


30 posted on 01/27/2009 4:58:24 AM PST by sickoflibs (Obama : " We need swift immediate action on my 10 year government spending plan")
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To: dirtboy

Instead of trying to create demand AND stop deflation at same time, how about letting deflation take it’s course, and letting the lower prices and costs be the stimulus? This would include the government cutting spending, I know, not happening, ever.

Remember when dems acted upset over high gas prices? now they are doing everything to raise them again.


31 posted on 01/27/2009 5:02:48 AM PST by sickoflibs (Obama : " We need swift immediate action on my 10 year government spending plan")
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To: rb22982
The fed is almost out of bullets. They only have 2 left and only one of which could work — buy US Gov’t long bonds. The next is printing but there are a lot of issues there

The Fed could buy high yielding corporates. They could buy GNMAs. They could buy CDOs. They could buy real estate. They can buy anything, not just Treasury securities.

32 posted on 01/27/2009 5:13:11 AM PST by Toddsterpatriot (Will the doomers ever buy a calculator?)
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To: sickoflibs
Instead of trying to create demand AND stop deflation at same time, how about letting deflation take it’s course, and letting the lower prices and costs be the stimulus?

The maxim about generals fighting the last war applies here - with a twist. The Fed and governments around the world are doing what the 'experts' said should have been done at the onset of the Great Depression - with the assumption that such would have actually prevented or at least alleviated such. But they are failing to both examine the structural differences between then and now, and are not critically examining the inherent contradiction that you pointed out. The end results will in turn be contradictory as a result - TARP recipeint banks reducing lending is just the most recent example.

33 posted on 01/27/2009 5:14:23 AM PST by dirtboy
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To: Cheetahcat
RE “Has the Fed become a part of the government all of a sudden?

You notice that? That is Schiff’s claim that it is and creates inflationary bubbles by printing money/super low savings interest rates to stimulate the economy. Even at the peak of the bubble savings account rates were 2-3% but ING could get 5%. Now it is zero, of course people are saving right now so you don't need high interest rates

34 posted on 01/27/2009 5:19:22 AM PST by sickoflibs (Obama : " We need swift immediate action on my 10 year government spending plan")
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To: dirtboy
RE :”The Fed and governments around the world are doing what the ‘experts’ said should have been done at the onset of the Great Depression

And if all I heard was from them I would believe it too. But the other theory is that it was asset bubbles caused by both low interest rates and federal stimulus (2002 case) , that caused the depression, and that the new deal actually lengthened the depression, by not letting the market correct prices. But Roosevelt evoked feelings of children to a parents that promises to make things better. He was my grandmothers hero. If you got a government job in the great depression you felt saved. Maybe he was the parent in the A+E Show Intervention that gives the addict child money, but gets it from the good child's credit card.

I can tell you for sure that those in Washington, especially democrats believe in the fixed pie theory and that they need to carve it up. That is a recipe for 1970s stagflation.

35 posted on 01/27/2009 5:34:03 AM PST by sickoflibs (Obama : " We need swift immediate action on my 10 year government spending plan")
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To: Travis McGee
Mish Shedlock pretty much dismantles the Schiff mystique today. Read it if you have not already. http://globaleconomicanalysis.blogspot.com/

Here we go. The personal attacks and minimization begins. Destroy EVERY messenger. NEVER let the opponent's message out and if it gets out, destroy the messenger and discredit the message.

Touche'... troll!

36 posted on 01/27/2009 8:47:24 AM PST by April Lexington (Study the constitution so you know what they are taking away!)
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To: sickoflibs
articulate republican with a conservative message relevant to Washington increasing power/redistribution grab, I would use them.

Use them for what?

What benefit in this name calling? Be articulate yourself. Get published. Be on TV. Spread the message. At least he's out there!

37 posted on 01/27/2009 8:50:50 AM PST by April Lexington (Study the constitution so you know what they are taking away!)
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To: Toddsterpatriot
The Fed could buy high yielding corporates. They could buy GNMAs. They could buy CDOs. They could buy real estate. They can buy anything, not just Treasury securities.

And how does this solve the debt funding problem? The Fed buying existing obligations (to bail out Wall Street scum) will put no new money into the system.

38 posted on 01/27/2009 8:53:50 AM PST by April Lexington (Study the constitution so you know what they are taking away!)
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To: sickoflibs

“Barack Obama is no smarter than Khrushchev or Mao...”

Come on!!You know Barry went to HARVARD!!!!


39 posted on 01/27/2009 9:13:56 AM PST by mo
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To: April Lexington; Fan of Fiat
The Fed buying existing obligations (to bail out Wall Street scum) will put no new money into the system.

How would the Fed pay for the existing obligations?

40 posted on 01/27/2009 9:15:14 AM PST by Toddsterpatriot (Will the doomers ever buy a calculator?)
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