Fed may monetize debt via purchasing Treasuries in days to ease credit

January 18, 2009 by · Leave a Comment
Filed under: Policy News 

We are have been hearing about this magical tool kit the Fed has at its disposal.  Now we find out it is the age old method of printing money by purchasing our treasuries from ourselves through the Federal Reserve.  This is injecting money directly into the economy.  

Once we get a recovery we will see inflation on the rise, it will begin because investors will have confidence and they will start investing.  Because of the de-leveraging process, production of many basic materials have come offline so that will create a lag effect that will be seen in much higher prices.  This is very bad fiscal policy and can result in hyper-inflation if we have too much money in the economy and people are to believe prices will continue to rise and they velocity of money increases to a rate that destroys the currency.  

News:

The Federal Reserve may purchase Treasuries within the next few days or weeks as it broadens its policy beyond interest rate cuts to ease credit conditions amid the worst recession in 25 years, according to UBS AG.

“Fed officials use every chance they get to highlight Treasury purchases as an important arrow in their quiver,” William O’Donnell, U.S. government bond strategist at UBS Securities LLC in Stamford, Connecticut, wrote in a research report today. “It now appears as if the Fed may use Treasury purchases as a blunt tool to bring loan rates down further. This makes it more likely that Treasury purchases come sooner.”

Fed Chairman Ben S. Bernanke reiterated Jan. 13 that he’s considering buying long-term Treasuries as a way to bring down borrowing rates and unfreeze private credit markets as U.S. economic data and government reports continue to show the recession is deepening.

The economy weakened in all regions during the past month, the Fed said the following day, as access to credit remains locked, forcing consumers to cut back on spending.

Lower rates could “spill over into private borrowing rates much more broadly,” Federal Reserve Bank of San Francisco President Janet Yellen said yesterday in a speech. UBS said Yellen’s comments refer to more than mortgage rates, which the Fed already started trying to lower this month by buying $500 billion of mortgage-backed securities.
 

Source: Bloomberg

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