Bloomberg reports that Bernanke may need 'massive' asset buying to counter contraction.
(emphasis mine) [my comment]
Bernanke May Need 'Massive' Asset Buying to Counter Contraction
By Craig Torres
March 17 (Bloomberg) -- Chairman Ben S. Bernanke and Federal Reserve policy makers may have to ramp up their purchases of mortgage securities and other assets after the economy and job market deteriorated further since they last met.
The Federal Open Market Committee, gathering today and tomorrow in Washington, needs to redouble its efforts after the central bank's balance sheet shrank 17 percent from a $2.3 trillion December peak, Fed watchers said. The retreat came even as Bernanke acknowledged the chance that the unemployment rate will exceed 10 percent for the first time in a quarter century.
"It takes massive
balance-sheet expansion [asset buying with printed money] to generate significant easing in financial conditions," said Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York who used to work at the Treasury. "More needs to be done."
This week's FOMC meeting could mark a shift toward more aggressive monetary expansion to fight deflation after demand waned for many of the Fed's existing programs. One top consideration is an increase in the pace and size of a $600 billion program to buy bonds issued and backed by U.S. housing agencies such as Fannie Mae, analysts said.
Other measures could include everything from purchases of Treasuries to corporate bonds, Tilton said. The Fed has already agreed to work with the Treasury on implementing a program to revive consumer and business loans, which the Obama administration has said could reach $1 trillion.
Analysts are skeptical. "The concern about the TALF is not so much the investor interest in it, but the availability of eligible" securities to buy, given lack of consumer demand for new debt, said Tilton of Goldman Sachs.
Consumers will borrow if they see solid job prospects and rising wealth, economists said. Right now, neither condition is in place. The unemployment rate in February was 8.1 percent, up almost 2 percentage points in the past six months. Household wealth fell by a record $5.1 trillion last quarter. Personal savings as a percent of disposable income has risen every month since August.
A less effective TALF would lead the Fed to use its authority to purchase assets and expand the supply of money, some Fed watchers said.
"I would be surprised if they didn't continue buying another $500 billion of mortgage-backed securities in the second half given the downside risks to the economy and the fact that the mortgage market is still in a shambles," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Rebel Traders reports that Bernanke's nightmare.
March 16, 2009
By ·9:48 a.m. today
The following chart is of the 10 year Treasury Note Yield..
Ben 'wants' to keep the yields low if he wants to keep mortgage rates low. A continued rise in the 10 year yield would make it much harder to keep interest rates low for homeowners.
If the 10 year yield breaks above 3.25% it would probably be the time when the FEDS will step in and buy their own notes to control prices/yields, as they have threatened to do for the past six months.
This should be what keeps Bernanke 'up at night'.
10 Year T Note Yield TNX
My reaction: There are only two real points to take away from these two articles:
1) The fed is expected to buy $500 billion of mortgage-backed securities this year.
2) If treasury yields continue to rise (and they will), the fed will start buying treasuries too.
The way the fed buys assets is by printing money and expanding the money supply. When the fed does start expanding its balance sheet again, it will put downward pressure on the dollar and upward pressure on gold.