Posted on 03/26/2002 6:36:59 PM PST by sell_propaganda
The US Federal Reserve in January considered a variety of "unconventional" emergency measures to be taken if cutting short-term interest rates failed to arrest a US recession and prevent Japanese-style deflation. One of those steps may have been a plan to buy US stocks.
According to minutes of its January 25-26 meeting, the Fed's policy-making Open Market Committee agreed "unconventional policy measures might be available" to deal with a situation in which "the economy were to deteriorate substantially in a period when nominal short-term interest rates were already at very low levels", although, it said, the efficacy of such measures was "uncertain". The minutes vaguely mention internal analyses of such a scenario.
The discussion appeared largely academic, conducted at a time when the year-long recession was drawing to a close. But the topic was apparently brought up in the context of concerns that the US could have faced - and might face in the future - a dilemma in which short-term interest rates were so low as to be rendered ineffective as a monetary policy tool.
Minutes which summarised the meeting were released last week. A full transcript will not be available for five years but a senior Fed official who attended the meeting said the reference to "unconventional means" was "commonly understood by academics".
The official, who asked not to be named, would not elaborate but mentioned "buying US equities" as an example of such possible measures, and later said the Fed "could theoretically buy anything to pump money into the system" including "state and local debt, real estate and gold mines - any asset".
The Fed currently relies on the buying and selling of Treasury bonds as a way of targeting short-term interest rates.
In its fight against the economic downturn, the Fed has reduced the Fed funds rate from a 10-year high of 6.5 per cent to a 40-year low of 1.75 per cent. The moves prompted speculation last year among some economists that short-term interest rates might at some point hit zero and that interest-rate policy might become useless.
The minutes said FOMC members agreed this scenario was "highly remote, but could not be dismissed altogether".
While not mentioned in the minutes, Fed officials appeared to have in mind the example of Japan, an economy mired in a decade-long slump. Deflation - or falling prices - and other problems have led the central bank to cut short-term interest rates to practically zero.
The minutes said Fed officials considered a similar US scenario and concluded: "If in the future such circumstances appeared to be in the process of materialising [in the US], a case could be made at that point for taking pre-emptive easing actions, to help guard against the potential development of economic weakness and price declines that could be associated with the so-called 'zero bound' policy constraint."
This "zero bound" scenario - in which the Fed funds rate would hit zero - has been discussed before by policymakers as the Fed has succeeded in driving inflation to 30-year lows. But talk of "unconventional policy measures" has never appeared in FOMC minutes.
Was? The nuclear threat from Al Qaeda or the Axis of Evil is quite sufficient. As I have said before: one nuclear weapon goes off anywhere in the world for any reason, and we will have a major market meltdown.
At this meeting, members discussed staff background analyses of the implications for the conduct of policy if the economy were to deteriorate substantially in a period when nominal short-term interest rates were already at very low levels. Under such conditions, while unconventional policy measures might be available, their efficacy was uncertain, and it might be impossible to ease monetary policy sufficiently through the usual interest rate process to achieve System objectives. The members agreed that the potential for such an economic and policy scenario seemed highly remote, but it could not be dismissed altogether. If in the future such circumstances appeared to be in the process of materializing, a case could be made at that point for taking preemptive easing actions to help guard against the potential development of economic weakness and price declines that could be associated with the so-called "zero bound" policy constraint.
Rubin illegally used the ESF to bail out his buddies at Goldman Sachs when Mexico went down the toilet in 1994 (I think).
The report was that S&P 500 contracts were bought at more than market rates to signal to the market that they should not bet on the market going down. No one in his right mind of course would pay more than market price for S&P 500 futures, so the behavior is suspicious, and the amount of financial leverage brought to bear on the market indicated the govt or someone else with huge amounts of capital.
Heaven forbid they should consider say, backing the US dollar with gold. That would be too logical.
The 535 chuckleheads in Congress could declare tomorrow that the leaves of deciduous trees were 'legal tender for all debts, public and private' if they decided to. One could make the argument that they already have come to think of it.
L
Thank you for my last smile of the day.
Your British class Understatement had me chuckling.
Good night.
L
Thanx for the response. So maybe my complaint is with Congress for spending more money than they generate in revenues....requiring the loans from the bankers...which result in wasted money on interest payments. And to add insult to injury, they let that debt ride which means we are paying interest on interest. Like someone who is incapable of managing their credit cards. I just can't believe that Americans are fine with that absolute waste of 100's of billions of $ on interest every year! This is a crime!!!
Is the medical sector immune to recession so far? It seems the party is still going on for them.
The trade deficit is running roughly at $400 billion per year. That means that foreign investors must buy $400 billion of our "stuff" to keep the current account balance all square. Morgan Stanley estimates that the US trade deficit will grow to over $600 billion in 2003, less than one year from now. Will foreigners want $600 billion of US stocks and bonds and real estate and companies? There are serious warning signs they will not.
In the period 1990-95 average annual European dollar flows from mergers and acquisitions (M&A) was only $10 billion. In 2000, Europeans invested over $600 billion in the US. Taking away US investments in Europe it was a net $214 BILLION to the advantage of the US. If I have the calculations right, that alone financed half of the trade deficit. Further, you are beginning to see investor flows to international stocks, many of which are more reasonably valued. The huge flow of net dollars into the US stock market seems to be the weakest link.
A $600 billion current account would require about $2B per day to finance. A lower dollar would be good for the debt since it could be paid off in cheaper dollars, but it could cause interest rates to rise. The price of foreign goods would increase helping our exporters. Right now the world economy appears to be entirely dependent on the American consumer and his credit card. What's curious is that the unnamed source in the article should mention gold mines since they would be the last asset in need of liquification and owners of gold mining shares would be furious and the gold conspiracy theory would be furthered. This could be the decade of real assets (as opposed to paper assets).
Well, they are pretty much the same color(in season) which is close enough for government work.
---max
That sounds an awful lot like the quasi Social Darwinistic attitude that fueled the beginning of the Great Depression.
The factor that will continue to pressure the economy is the demand management policies of the Bush Administration and Alan Greenspan. Considering that we are in a deflationary environment, your theory that economic under performance is being caused by marginal companies doesn't make any sense.
I don't know how it is for dentists, but liability insurance for obstetricians in my area has gone up about 600% in the past year.
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