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The Fed Levers Up

Posted by Larry Doyle on March 18, 2009 6:30 PM |

When the economy experiences a massive delevering process, the void in the economy needs to be filled. There has been and will continue to be ongoing debate about the effectiveness of the stimulus plan, Obama’s proposed budget, ongoing government bailouts of a variety of industries, and moves made by the Treasury and Federal Reserve. Has enough been done? Is too much being done? Are our global partners pulling their weight? Are protectionist measures likely to exacerbate our economic problems? The answers to these questions will not be known for years.

Today’s action, Fed’s New Steps Shake Up Markets, is a sign that as everybody is delevering (selling assets purchased with borrowed money), the Federal Reserve is levering up. The Fed has indicated they will purchase billions more than previously advertised in U.S Treasury securities, mortgages, and consumer related assets. Why? By making these purchases, the Fed will attempt to drive the rates for these products lower and reignite consumer and institutional demand for credit. The market responded in startling fashion as 10yr government rates dropped an unprecedented .50% !!  Equity markets responded by moving higher by 1-2%.

While it is nice to see stocks and bonds move higher in price, the question I have is whether the Fed made such an aggressive move based on signs they see of the economy weakening further. Are the risks of an even deeper recession greater than previously thought?

Sense on Cents will be all over it!!

LD

  • TeakWoodKite

    LD, I get the feeling the Fed is like one of those sponges one uses for grouting…no matter how much one tries,
    you can’t rid it of the grit.

    How much toxicity can the Fed absorb?

  • Larry Doyle

    The Fed is clearly making a statement that it will expand its’ balance sheet until they’re finished.

    While bonds screamed higher, and stocks moved higher by 1-2%, don’t break out the party streamers just yet. As former St. Louis Fed chair Bill Poole indicated yesterday, these moves could be viewed as a sign the Fed believes the economy is even weaker than people thought.

    What is the price of this “quantitative easing?” Future inflation. Where do we already see signs of that? The u.S. dollar has gotten hit hard overnight, and oil and gold are both higher as well.






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