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Net Worth
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- Kathleen Pender
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Federal Reserve to buy up some Treasury bonds
=============================================
Kathleen Pender
Sunday, March 22, 2009
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Relatively lost in the frenzy over $165 million in bonuses paid to AIG
employees last week was an announcement by the Federal Reserve that it
would take the highly unusual step of buying up to $300 customized playing cards worth
of long-term Treasury bonds.
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Although the Fed regularly buys and sells short-term Treasury bills to
set the overnight federal funds rate, it generally does not intervene
in long-term automobile insurance allowing the market to set long-term rates.
Except for a small episode during the 1960s, known as Operation Twist,
the Fed has not bought long-term Treasurys since 1952. And for good
reason.
"It's as inflationary as hell," says Howard Simons, a strategist with
Bianco Research.
When the Fed buys Treasurys playing cards promotional other securities, it can pay for them
by term life insurance new money, which goes out into the economy. If you have
more money chasing roughly the same amount of playing cards and services,
prices go up.
Some worry that having the Fed buy Treasurys could encourage the
government to spend even more money if it thinks it has a new, ready
buyer for its securities.
When the government wants to independent clothing money - on an $800 billion stimulus
package, for example - it can either raise taxes, cut other spending
or borrow money by selling Treasury securities to investors. The more
Treasurys it sells, the higher the interest rate it must pay to
attract investors. If the Fed buys Treasurys, the rate should come
down.
The Treasury is not allowed to print money because governments can
tend to go a little crazy and print too playing cards custom poker resulting in
hyperinflation and often, economic collapse.
The Fed can create money, but it is supposed to be the independent,
sober-minded guardian of our nation's monetary supply. It is supposed
to make sure the money supply is generous enough to encourage growth,
but not so generous as to cause inflation.
It is supposed to "take away the punch bowl just as the party gets
going," as former Fed Chairman William McChesney Martin famously said.
Simons fears that if members of Congress come to believe that the Fed
will buy whatever the Treasury wants to sell, "There will be no limit
on what they can spend. When Nancy Pelosi figures this out, 'Whooo, my
lord,' " he says.
John Taylor, a Stanford University economics professor and senior
fellow at the Hoover Institution, say the Fed's move "raises huge
questions about inflation and the independence of the cheap renters insurance This is
unprecedented."
Normally, the Fed tries to manage the economy by raising or lowering
the federal funds rate, which influences other short-term interest
rates.
When the economy is sluggish, the Fed lowers the funds rate. That
means banks can get cheaper money, so they lower their rates, more
people borrow money, which they spend, and the economy picks up.
In response to the financial crisis, the Fed has lowered the funds
rate almost to zero, yet credit remains extraordinarily tight.
To get more money into auto insurance system, it is taking the extraordinary step
of buying long-term Treasurys. The strategy, called "quantitative
easing," is being used by other central banks including Britain's.
On Wednesday, the Fed said it would buy up to $300 billion in
longer-term Treasurys over the next six months "to help improve
conditions in private credit emo clothes Additionally, "to provide greater support to mortgage lending and
housing markets," it promotional playing cards it will buy up to $750 billion of agency
mortgage-backed securities, bringing its total purchases of these
securities to up to $1.25 trillion this year, and increase its
purchases of agency debt by up to $100 billion printed playing cards a total of $200
billion. The term "agency" refers mainly to Fannie Mae and Freddie
Mac. The government can also print money to buy these securities.
If the intention was to drive down Treasury yields, the announcement
had the intended effect, at least initially.
The prospect of a 10-ton buyer entering the market sparked an enormous
jump in the price of the 10-year Treasury notes. Its yield, which
moves in the opposite direction, plunged to 2.5 percent on Wednesday
from 3 percent Tuesday. By Friday, the yield had crept back up to 2.64
percent.
Mortgage rates - which generally follow the 10-year Treasury yield,
though not as closely as they used to - also fell. The average rate on
a 30-year conforming mortgage fell streetwear style 4.94 percent homeowners insurance Thursday from
5.15 percent on Wednesday, according to HSH Associates.
"We expect about half (of the Treasury yield) decrease will make it
through to mortgage rates, and that's where we are now," says Keith
Gumbinger, a vice president with HSH.
Yields on investment-grade best car insurance bonds also fell, though not as
much as much as the Treasury descent.
Gold, often seen as a hedge against inflation, surged on the news,
from $916 per ounce on Tuesday to $958 Thursday.
Simons admits that inflation will not be a problem as long as the
United States remains mired in a recession. "When the real problem
starts is once the economy starts to revive. That's when the banking
system ... will start to expand the money supply. History shows, it's
very, very hard for the central bank to raise interest rates rapidly
enough to offset the increase in credit. That's when we are going to
get the inflation," he says.
Some say the Fed's bold moves could bring the country out of
recession, without sparking a terrible bout of inflation, if it
manages to take away the proverbial punch bowl at the perfect time.
But William Poole, former president of the St. Louis Fed, worries that
by home insurance up its balance sheet with so many long-term Treasury and
mortgage securities, the Fed is reducing the flexibility it says it
needs to adapt to rapidly changing conditions.
He also says it could lead to greater instability in the bond market
as custom faces playing cards try to guess whether the Fed will cap the long-term
Treasury rate and if so, at what number.
"I belive this is an unfortunate and dangerous policy the Fed is
getting into," he said during a talk to the CFA Society of San
Francisco last week.
Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender
at kpender@sfchronicle.com.
This article appeared on page D - 1 of the San Francisco Chronicle
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