The Fed is giving itself a headache as it debates whether to support long-term bond prices:
If the Fed forgoes its purchases of Treasuries, we can add a few hundred billion more to Uncle Sam's borrowing costs as the rates on 30-year Treasuries rise to attract foreign buyers. Buying mortgages and business loans is one way to support the credit markets, but I think there's more at work here. Some Fed governors have openly wondered how the Fed can fulfill its inflation fighting mandate in the aftermath of its massive lending programs. Signalling a newfound reluctance to buy Treasuries is one way to signal to the markets that the Fed still worries about inflation, even if such worry is merely a stalking horse for backstopping business credit.
Enjoy the kabuki theater while it lasts, folks. The most likely outcome IMHO is for the Fed to keep buying everything in sight: Treasuries, mortgages, junk bonds, your aunt Martha's cat, you name it. This splurging with new currency ends as it always has in history: with inflation.
Federal Reserve officials have failed to resolve an internal debate over whether to purchase long-term Treasuries, even as rising yields on the securities threaten to undermine the central bank’s objective of cutting borrowing costs for consumers and businesses.
If the Fed forgoes its purchases of Treasuries, we can add a few hundred billion more to Uncle Sam's borrowing costs as the rates on 30-year Treasuries rise to attract foreign buyers. Buying mortgages and business loans is one way to support the credit markets, but I think there's more at work here. Some Fed governors have openly wondered how the Fed can fulfill its inflation fighting mandate in the aftermath of its massive lending programs. Signalling a newfound reluctance to buy Treasuries is one way to signal to the markets that the Fed still worries about inflation, even if such worry is merely a stalking horse for backstopping business credit.
Enjoy the kabuki theater while it lasts, folks. The most likely outcome IMHO is for the Fed to keep buying everything in sight: Treasuries, mortgages, junk bonds, your aunt Martha's cat, you name it. This splurging with new currency ends as it always has in history: with inflation.
