UK House Prices

At least, we can count on True Love

the US are stepping up buying their own bonds, thus diluting the dollar.

September 1, 2010, 2:30 am

Federal Reserve officials expressed considerable uncertainty before they took a nearly unanimous vote on Aug. 10 to take a modest step to bolster the flagging recovery, according to the central bank’s minutes of the meeting, Sewell Chan writes in The New York Times.

The meeting, which lasted 5 hours and 35 minutes, longer than usual, ended with the Federal Open Market Committee, which sets monetary policy, voting 9 to 1 to use proceeds from the Fed’s mortgage bonds to buy long-term Treasury securities.

The action was largely technical — it merely prevented the Fed’s bond portfolio from shrinking [...]

While the committee closed ranks behind the Fed chairman, Ben S. Bernanke, who supported the move and whose views are generally decisive in setting policy, the minutes suggested that he would have to go even further to overcome his colleagues’ reservations if the Fed were to resume buying huge quantities of government debt — an action Mr. Bernanke has said he is prepared to take if the economy worsens significantly.

Economists say the Fed's first option will be to buy US Treasuries, in the hope that this will reduce mortgage rates - which are traditionally related to Treasury yields - and so raise households' disposable incomes. But Michael Gapen at Barclays Capital warns that such a move is only a possibility, rather than a probability and the Fed will only move if employment falls or if GDP growth looks like dropping below 1.5 per cent.

And this isn't likely very soon, says Charles Dumas of Lombard Street Research. He believes that GDP growth was depressed in the second quarter by a flood of imports from China, caused by Chinese producers taking advantage of export incentives which the government has since withdrawn. As import penetration falls back, he says, GDP growth could accelerate once again.

Other economists say that even if the Fed does buy Treasuries, it won't necessarily stimulate the economy. It is bank finance, rather than capital market finance, that is in short supply. What's more, lower bond yields might even depress the economy, if firms interpret them as a sign of worsening prospects; traditionally, bond yields have been a good economic forecaster.

For this reason, some advocate a more radical policy. Nick Rowe, a professor of economics at Carleton University in Ottawa, says the Fed should buy cyclical assets such as corporate bonds and equities. Rises in their prices, he says, might improve business optimism and so encourage investment and hiring.

Whereas Canada is likely to retain a strong currency. Good luck in selling your natural resources to the Yanks for confetti.

the Bernanke announcement of more QE imminent?

In his remarks, the Federal Reserve chairman came across as a sober-minded central banker who is prepared to act forcefully if the economy weakens. That force could come in the form of the Fed buying large amounts of bonds to help further lower borrowing costs, a policy that was used during the financial crisis and is sometimes labeled quantitative easing, or QE. While Mr. Bernanke did discuss expanding the Fed's bond holdings, he also suggested it wasn't yet necessary because economic growth looks likely to pick up next year.

I suspect that we are the only posters who like jazz.