Tuesday, August 3, 2010



This morning’s (i.e., Tuesday, 8/3/10’s, page A1) Wall Street Journal reports that the Fed is considering purchasing more treasuries and mortgage bonds, or at least maintaining its inventory of said bonds by reinvesting the proceeds from matured bonds in the treasury and mortgage markets. The Fed is thus, out of a concern that the economy still is not strong enough to sustain even a gradual withdrawal of monetary stimulus, reconsidering its prior decision to let its inventory of mortgages and treasuries, acquired in the “emergency” of a few years ago, run down.

I’m not the first person to say this, but does the Fed really think that continuing its presence in the bond market is the wisest course of action in the midst of what some are calling a bond bubble that has brought the two year to 53 basis points and the ten year to 2.90%, resulted in the lowest mortgage rates in history, and allowed, for example, Charles Schwab a few weeks ago to sell ten year paper at 150 over treasuries? Does the Fed think that it is the level of interest rates that is stifling economic growth? If so, just how much lower does the Fed think rates will have to go before things turn around? How does the Fed justify continuing to punish savers and reward spenders in an economy that, despite a savings rate that has returned to its historic levels of about 6%, still lags most of the world in savings and that was nearly driven over the figurative cliff not two years ago as a result of its ingrained profligate spending habits? Has the fed chugged and guzzled the deflationary kool-aid at a clip that would impress a 22 year old out for a big Saturday night at a Western Avenue gin mill?

Or does the Fed’s “considering” (read “deciding on”) maintaining its inventory of treasuries and mortgage bonds really an admission that it has no idea what to do with an economy that just won’t seem to budge?

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