In the last week, the Federal Reserve Bank has said that it’s going to keep on buying mortgage debt (euphemistically called “mortgage-backed securities (MBS)”), and that it’s actually going to increase the purchase rate. In addition to buying up MBS at $40 billion per month, they’re also going to buy $45 billion/mo of T-bonds. Astonishingly, they’re going to pay for both by issuing new reserves to banks. The Fed will continue to do this until certain unemployment thresholds are crossed.
It makes very clear to the public that the Fed will not stop until these targets are hit. Markets, in turn, should respond in anticipation of these goals being hit. That is, the elevated demand for liquid assets should start declining as households and firms start moving their funds into higher yielding assets. This rebalancing should raise asset prices, help repair balance sheets, and ultimately spur nominal spending. In other words, by better managing expectations, the Fed should cause the public to do the heavy lifting—and they already have started. If all goes according to plan, the Fed may not have to actually purchase that many additional assets. Ironically, this means that had the Fed been doing this all along its balance sheet would be much smaller now
On the other hand, King Banaian, also for Ricochet, writes
This would induce private lenders to leave the MBS market and hopefully make loans to the business sector. Meanwhile, short-term interest rates would rise.
Reserves eventually become money. Currently, most reserves are held by banks who receive interest on them from the Fed. In short, the Fed is using its profits from operating in money markets to induce banks not to lend the reserves they are printing with one hand, while manipulating interest rates to encourage borrowing with its other. And this process threatens to debase our currency. The lone dissenting vote from Wednesday’s meeting, Richmond Fed president Jeremy Lacker, noted the Fed had only a few years ago agreed with Treasury that steering credit is not a job for monetary policy. Yet now that’s precisely what they’re doing.
The problem is that the power of all that additional money in the economy, when it does start to get spent (assuming the Fed’s credit manipulation works and “higher yielding assets” do turn into increased spending)—and lent, which exponentially expands the capacity to spend—is explosively inflationary. By the time that inflation is recognized to be on the horizon, though, it’s actually already in full throat. That inflation will then destroy the value of all that extra money poured into the economy, leaving us all where we are today—only with three times as much money, each dollar of which is capable of buying only one-third as much.
Maybe the Fed should stop. Maybe the Fed should simply get out of the way and let our economy recover without the strait jackets of Fed debt-buying and of Progressive Do-Good welfare pushing. The Fed can’t do anything about the one. But it doesn’t have to do the other.
And this doesn’t even get into the smoke and mirrorsexpectation management that the Fed now admits is the sum and total of all that it’s doing.