Wednesday, April 8, 2009

Yellen: Fed Talking to Congress About Issuing Its Own Debt

San Francisco Fed president Janet Yellen seems to be the point person when it comes to discussing the Fed's desire to issue its own debt.

According to MarketWatch, after a speech today in NYC during a Q&A session, Yellen said:

The central bank is in talks with Congress about some new tools that would help the Fed's exit strategy...
One idea would be to allow the Fed to issue debt to sop up excess reserves.

"Issuing such debt would reduce the volume of reserves in the financial system and push up the funds rate without shrinking the total size of our balance sheet."
As I have pointed out before, the Fed'd desire to issue debt is a direct result of the junk that the Fed is buying from banks now. When the Fed determines that it is necessary to shrink the money supply by selling assets, the assets it has bought will never be able to fetch anywhere close to the price they paid for them. Thus, the desire to issue debt to sop up high powered money that is in the system.

That said, it should be noted that any debt issuing by the Fed will not come without costs. Not only will the drain of high powered money push the Fed funds rate up, but the borrowing by the Fed will also have an upward impact on interest rates and further crowd out private sector borrowing.

Thanks to No Axe for the link.

1 comment:

  1. Made the Lex Column this morning:

    "Goldman Sachs points out that the Fed can rein in many of its programmes very quickly if necessary, and raise interest rates or even issue its own debt to soak up liquidity."