A Wall Street Journal article reported: “The Treasury said it will borrow $200 billion and leave the cash proceeds on deposit with the Federal Reserve, reviving a program that will make it easier for the Fed to raise interest rates when the time comes.” I had to read that sentence several times to try and understand what it said. I still have no idea what it means.
You see, if the Treasury were able to borrow money, we would not have QE (quantitative easing). QE is when the Fed, directly or indirectly purchases Treasury Bonds because others won’t. Furthermore, I cannot see anyway that setting this fund up will “make it easier for the Fed to raise interest rates when the time comes.” What has this fund to do with raising interest rates? Is raising interest rates a difficult thing? Does the Fed need help doing so. Possibly, but only because they are so out of practice. Isn’t raising interest rates so simple a Caveman could do it, without help from the Treasury?
I read through the entire article several times. There is no way to make any sense of this move unless you believe the Fed intends to continue its machinations of adding more questionable assets to its balance sheet. After all, that was what the program was originally intended for. If the Fed is truly done with stimulating, there is no need for this fund.
It is likely this is merely Fed “smoke” or duplicity. I do not believe they can get out of QE until the government gets deficits to a fraction of what they are currently running. Based on 10-yr projections, that isn’t going to happen for more than 10 years.
Of course, the other explanation is just sloppy journalism (which it appears to be anyway).
If anyone can explain this, I would love to hear from you.
To me it meant the FED is broke.
[...] FED Bunkum By Monty Pelerin, posted February 25th, 2010 http://www.economicnoise.com/2010/02/25/fed-bunkum/ [...]
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