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Reason Foundation

When Does it End? The Fed Eases Once Again

James Groth
September 21, 2011, 4:21pm

The Federal Reserve FOMC announced today its plan to purchase $400 billion of Treasuries with 30 to 6 year maturities and to sell an equal amount of Treasuries with remaining maturities of 3 years or less. This comes as no surprise to anyone – especially big banks, institutions, and of course primary dealers.

Take a look at this chart:

This is a six month chart of 30-year T-bond futures. The huge run-up began on July 29 just two days after the Dow Jones began its plunge from highs on July 27. Big banks and institutions, especially primary dealers with the Fed, have been positioning themselves for this announcement for two months now. They’ve been buying the long end of the curve and selling stock knowing full well of the action that was announced at 2:15, and given the fact that purchases will continue until June 2012, that leaves nine months to bleed off the principal and reap the gains – just in time for the yield curve to become flat from three months to thirty years. Hell, the Fed could flatten it all the way out to 100 years should Tim Geithner and the Treasury get so ambitious.

So when does it all end? How long can the Fed continue to manipulate and distort prices, markets and our savings/futures? The announcement came with plenty of downgrades to the economy, but again it gave no plan for an exit timeline or likely actions should an “unexpected” bout of inflation threaten price stability. The FOMC merely said:

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.

Some solace came in the form of three dissenting votes to the further Fed accommodation once again coming from Presidents Fisher, Plosser, and Kocherlakota. The rest of the board, however, won’t budge on advocating more easing, and some members, like President Evans, would like the Fed to bet the farm on lowering unemployment calling for “significant easing.”

Fed policy operates on a considerable lag relative to inflation, and as such the Fed should be future minded particularly considering that they, and they alone, have sole control over long-term price stability. Continuing to experiment in the short-term with a range of policy tools is not only showing no economic benefit, but is creating huge uncertainty for individuals and businesses, not to mention threatening the long-term stability and security of our currency and providing massive carry trade and principle trades for large financial institutions like the one described above. Without any plan for the future, and no precautions for adverse situations being made, the Fed appears content to continue gambling. That used to be the banks’ business; now it’s just free money.


James Groth is Research Associate


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