Yesterday, the Fed made a pretty big move. It announced an additional $1.15 trillion of stimulus, saying it would buy up to $300 billion of longer-dated Treasury securities, and $850 billion more of mortgage agency debt and mortgage-backed securities than previously planned.
The way I sum it up is:
1. The Fed was basically doing an "end-around" to the obstructionists in Congress who caused the government's stimulus package to be watered down so as to not have enough spending to reduce unemployment fast enough, specifically in the area which was the worst hit - housing. The Fed wants to speed up bank lending - both by buying mortgage-backed assets and hoping to lower interest rates.
The Fed wants to take a deflationary depression off the table.
2. However, in the process, the Fed significantly risks inflation, a weakening dollar, rising commodity costs and long-term interest rates rising significantly.
3. Let's take a worst case scenario resulting from this move, with #2 spiking significantly. In that case, the Fed could back off from the program and return to having the government issuing debt rather than the Fed monetizing debt, and raising interest rates slightly to choke off any building inflation. This would mark the Fed's move a failure and while some damage would have been caused, but likely the damage could still be mitigated.
4. Now, for the potential good. As long as #2's risks were just moderate for a reasonable length of time, that could really help things. a) Some inflation is actually good b) a moderately weakened dollar is also good - both to spur exports and help other economies around the world b) rising commodity costs will certainly help many of the emerging and developing nations' economies where many are resource-based. This mess is global and we need other nations to also recover, in order to help us.
5. Since this is such a bold move, we need to wait awhile before being too quick to judge the move, at least a week - maybe up to a month, to see how the financial markets react. So, I'll wait awhile.
6. A few comments - a) The Fed is basically creating disincentives to saving - with a lot of incentives for people to spend and borrow. b) As for stocks, it has been said "not to fight the Fed", and the Fed is basically saying buy stocks. So, buying some stocks is reasonable, especially ones which pay dividends higher than CD or Treasury rates, while also keeping some money in reserve in case the market goes lower. Also, having some gold and inflation-protected Treasuries (TIPs) is reasonable.
7. Again, a bold move, and really too soon to judge it.
No comments:
Post a Comment