Zimbabwe along the Potomac

Buying bread

The Wall Street Journal has a round up of economists’ reactions to today’s Fed decision to buy its own bonds here.

 Some are positive, some are not. I think I side with those who are frightened. One bright spot: mortgage rates should fall, at least until inflation kicks in. Look to refinance shortly, maybe. Or heck, buy a house!

• If there’s one aspect of the current environment that still amazes, it’s the fact that nothing amazes anymore. Even today’s announcement that the Federal Reserve plans on purchasing everything in America that isn’t nailed down raised relatively few eyebrows on our end… Effectively, the Fed is monetizing the Treasury’s debt, a strategy that appears in the encyclopedia under the heading “how to trigger inflation.” In any other environment, this monetization would be deeply troubling, but given the lack of end user demand, the prospects for a near term pop in prices is rather remote. The aggressiveness also suggests that the Federal Reserve remains highly concerned about deflation. –Guy LeBas, Janney Montgomery Scott
• These increases may reflect The Fed has decided to be the central bank that swallowed the Bank of England’s canary! … We are not, however, convinced of the sustainability of the Treasury rally (ten-year yields fell about 50 basis points in response to the news — very similar to the move in the gilt market). However, the scale of the Fed’s proposed purchases of Treasuries (relative to the size of the debt and the deficit) is much smaller than the Bank of England’s purchase (it would have had to be well above $1 trillion to be comparable). In addition, we are not convinced that we are headed for deflation and we worry about the longer-term inflation implications of these purchases. –RDQ Economics
• The Federal Reserve opened the sluice gates wide, hoping to fill the canyons of finance with liquidity. In an extraordinary step, the FOMC said it would double its purchases of mortgage-backed securities and agency debt from $600 billion to $1.25 trillion. More importantly, the announcement marked the Fed’s formal adoption of a pure quantitative easing policy… Although the notion of quantitative easing has been much discussed in the past few months, the policy clearly took effect today. Many thought it would never come to pass. In many ways this is a tragedy that could have been avoided. But that discussion is better left for another day. What is encouraging is that the diversity of voices and opinions on the FOMC were able to converge on a cogent and comprehensive policy to facilitate the flow of credi –Joseph Brusuelas, Moody’s Economy.com