Thursday, March 26, 2009

Fed Seeks Power to Issue Own Debt When Crisis Ebbs, Yellen Says

EPJ reader No Axe spotted this Bloomberg story on the reason behind the Fed's desire to issue debt.

As readers know, and I hate to be a broken record about spotting something else ahead of the pack, but early last year I commented that the Fed wanted to issue debt as a way to drain reserves.

The Fed's Janet Yellen has now confirmed this. Reports Bloomberg:

The Fed normally raises interest rates by selling Treasuries on its balance sheet, draining reserves from the banking system. That task is tougher with the Fed’s commitment last week to buy more than $1 trillion in mortgage-backed securities, which are harder to sell quickly without roiling markets. The central bank cut its main rate to almost zero in December and switched its focus to emergency credit programs.

On the power to sell debt, “I would feel happier having it now” so the Fed could use that authority to adjust its balance sheet, Yellen told reporters yesterday after a New York speech. Even without that tool, “there is a great deal we can do,” she said, “but it would certainly be a nice thing to have.”

Yellen said she was unsure whether the central bank has formally requested authority to sell its own bonds or informed Congress it plans to make such a request....

“For all the people sitting here expressing their concern about how will we avoid inflation, it would be nice to have that tool and be able to say, ‘Look, when the time comes, we’ve got this and we can use it in an unlimited sense,’” Yellen told reporters yesterday.
All this talk about "tools" is Bernanke talk. He is truly using the American economy as a private laboratory. And, I honestly believe he is going to blow the economy up.

Whether he has this tool, or not, the minute he starts to drain reserves, in a manner that slows money growth, the stock market and economy crash. He is in a major box. If he money growth slows, the economy will crash, and what has occurred so far will look like a mild burp. If he doesn't drain, we are headed for major stagflation---with an interim period where things look good for awhile.

1 comment:

  1. I'll give it to ya, you called this one. But I still think you would have claimed victory if durable goods order had been crushed...

    By the way the quoted economist Michael Feroli? He was in my class at NYU. When he got hired by the Fed I was hoping he'd rise through the ranks so someday we would be debating and I could say, "We meet again" or something dramatic.