I was following the LiveBlog on WSJ. Here’s a link to the FOMC statement.
So according to the fractional reserve, does it mean we are gonna have 6 trillion new credit in the economy?
Adding some additional information: here is the NY Fed’s statement detailing purchasing plans.
Haha, I just got an e-mail notification about this happening and I was about to post a thread talking about it.
Can someone explain to me what the Fed is doing in general and the implications it holds? I’m still not very good at understanding some economic things.
My translation of the Associated Press article on this topic:
The Federal Reserve announced a bold plan Wednesday to try to kill the U.S. economy by buying $600 billion more in Treasury bonds from the subprime U.S. Federal government by expanding the money supply which devalues it.
The Fed said it would buy about $75 billion a month in long-term government bonds through the middle of 2011 to lower the dollar’s value to create fear of growing inflation to incentivize consumers to spend money before it devalues more.
The idea is for cheaper loans to get people to spend more and stimulate hiring. Hyperinflation will happen depending on the money’s circulation speed, but Fed officials assured investors they will meet that challenge when it arises.
My translation of the Associated Press article on this topic:
The Federal Reserve announced a bold plan Wednesday to try to kill the U.S. economy by buying $600 billion more in Treasury bonds from the subprime U.S. Federal government by expanding the money supply which devalues it.
The Fed said it would buy about $75 billion a month in long-term government bonds through the middle of 2011 to lower the dollar’s value to create fear of growing inflation to incentivize consumers to spend money before it devalues more.
The idea is for cheaper loans to get people to spend more and stimulate hiring. Hyperinflation will happen depending on the money’s circulation speed, but Fed officials assured investors they will meet that challenge when it arises.
Well they have to do something! Do you want them to sit idly by and do nothing? The electorate will not stand for that.
My translation of the Associated Press article on this topic:
The Federal Reserve announced a bold plan Wednesday to try to kill the U.S. economy by buying $600 billion more in Treasury bonds from the subprime U.S. Federal government by expanding the money supply which devalues it.
The Fed said it would buy about $75 billion a month in long-term government bonds through the middle of 2011 to lower the dollar’s value to create fear of growing inflation to incentivize consumers to spend money before it devalues more.
The idea is for cheaper loans to get people to spend more and stimulate hiring. Hyperinflation will happen depending on the money’s circulation speed, but Fed officials assured investors they will meet that challenge when it arises.translation of the Associated Press article on this topic:
The Federal Reserve announced a bold plan Wednesday to try to kill the U.S. economy by buying $600 billion more in Treasury bonds from the subprime U.S. Federal government by expanding the money supply which devalues it.
The Fed said it would buy about $75 billion a month in long-term government bonds through the middle of 2011 to lower the dollar’s value to create fear of growing inflation to incentivize consumers to spend money before it devalues more.
The idea is for cheaper loans to get people to spend more and stimulate hiring. Hyperinflation will happen depending on the money’s circulation speed, but Fed officials assured investors they will meet that challenge when it arises.
I don’t know exactly and neither do the Fed. I would prefer they not state an exact number. The Fed should do whatever is necessary to hit its implicit 2 percent inflation target. I don’t much like inflation targeting, because I believe it can distort relative prices. My policy preferences are not realistic alternatives. But what is needed now more than anything else is some predictability; the Fed needs to commit to some path for future monetary policy.
quick question…
how does the fed determine which banks get the new money?
do banks fight over who gets to sell toxic assets or treasuries back to the fed?
limitgov,
The Fed will conduct I kind of auction, I think. I don’t know how it works exactly. Where the money goes depends on who the seller is.
Banks may just hold additional reserves, but non-bank sellers will find themselves with money in place of a bond. They will likely spend that money on other financial assets, i.e. lend it out to earn interest. The borrower then spends the money on real goods and increases aggregate demand. But notice how the banks haven’t expanded credit in this story. I don’t expect them to until aggregate demand rises a little more and reduces the risks of lending. The channel through which quantitative easing will stimulate the economy is not necessarily the fractional reserve lending route.
Sorry for all the Keynesian words.
The Fed doesn’t conduct the auction, the Treasury does. The Fed will buy Treasury notes of specified maturity each month. The money than goes from the Treasury to the banks through the Office of the Comptroller of the Currency.
The Fed will hold its auction for selling its stock of various T notes and bills when it’s time to constrict the money supply, but that won’t happen until inflation becomes a worry as opposed to a goal.
No one in the Fed is an elected official, so they could do nothing and the electorate would have absolutely zero recourse.
1 trillion in bonds.
The “100 billion dollars” line isn’t absurd anymore…
Purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions operated through the Desk’s FedTrade system. Consistent with current practices, the results of each operation will be published on the Federal Reserve Bank of New York’s website shortly after each purchase operation has concluded. In order to ensure the transparency of our purchase operations, the Desk will also begin to publish information on the prices paid in individual operations at the end of each monthly calendar period, coinciding with the release of the next period’s schedule.
I wish we were still $3 trillion in debt. That point in time seems so good now.
http://www.newyorkfed.org/markets/opolicy/operating_policy_101103.html
On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.
http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html
The FOMC delegates responsibility for implementing U.S. monetary policy to the Manager of the System Open Market Account (SOMA) at the Federal Reserve Bank of New York through the Authorization. This Authorization is contained in the minutes of the first FOMC meeting of each year.
The SOMA Manager is responsible for the staff of the Trading Desk at the Federal Reserve Bank of New York (“the Desk”). The Desk thus executes open market operations on behalf of the entire Federal Reserve System.
The Federal Reserve conducts open market operations with primary dealers—government securities dealers who have an established trading relationship with the Federal Reserve . . .
Staff on the Desk start each workday by gathering information about the market’s activities from a number of sources. The Fed’s traders discuss with the primary dealers how the day might unfold in the securities market and how the dealers’ task of financing their securities positions is progressing. Desk staff also talk with the large banks about their reserve needs and the banks’ plans for meeting them and with fed funds brokers about activities in that market . . .
When the conference call is complete, the Desk conducts any agreed-upon open market operations. The Desk initiates this process by announcing the OMO through an electronic auction system called FedTrade, inviting dealers to submit bids or offers as appropriate.
http://www.newyorkfed.org/markets/pridealers_current.html
List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
UBS Securities LLC.
The decision to purchase bonds had been in the air for a few weeks. All that remained to be determined was the size.
600 billions is serious money, even for monetary inflation-happy bankers. It would mean the Federal Reserve will become the first holder of US bonds, ahead of China and Japan. It means the US government doesn’t think the Chinese and the Japanese will buy US bonds at the pace they were accustomed to: we can only speculate about the reasons.
The results will be the predicted November dollar mini-rally (which is already sending the Tokyo exchange skyrocketing: let them have their little vacation before they crash back to reality) and probably a six months boom in commodities and stocks next year (educated guess: around May-June). This will help drive GDP growth and that’s all that matters: who cares if the “real world” will still struggle? And of course price increases of goods such as fuel, flour etc (which are sure to follow) can always be blamed on external causes and as usual will contribute little to the CPI.
In 2007-2008 some of you predicted we were headed for an inflationary depression. Step up and collect your prize.
@ Kakugo: $600 billion is very serious money. It is approximately 7% of Sept. 2010 seasonally unadjusted M2 according to the latest H6 report by the Fed.
Come a long way from those old democrats talking about “dafficits”. The government overspent one trillion dollars this year alone.
QE2 was predicted to be around $500 billion. Guess the Fed thought that wasn’t enough and practically doubled it. At $500 billion some were projecting a devaluation of the dollar at around 20% (assuming the Fed can actually control it). Is $1 trillion double that or much greater. I think the latter.
In the short term, will buying up of treasuries give a short boost to the dollar?
I understand that in the long term, it will further devalue the dollar and maybe lead us to hyperinflation, but in the short term, will it boost the dollar since all the treasuries will be bought up?
@ limitgov:
I am by no means an expert in the bond market, but if I had to guess, I’d say that the short term effect would be a bit of inflation with the increased money supply, given that banks lend the money out.
Interest rates may come down a little, in order to entice borrowers.
Imports to the US may become more expensive if the dollar loses value to other currencies; on the other hand, US exports will be more affordable on foreign markets.
Also, there are always Treasuries available, whether on the primary or secondary market, you can always get your hands on some if you want to.
Yes, in short term the dollar will be boosted. And that’s all that matters. Just look at the immoral cretins running stock exchanges: Tokyo jumped more 2% today. The reason: stocks of companies exporting large volumes of goods to the US (Sony, Honda, Hamamatsu etc) are selling like hot bread. Why? because people believe the dollar will be boosted and hence US imports will increase. I am still to check DAX (Frankfurt stock exchange) but I suspect it will be exactly the same.
Actually a November mini-rally for the dollar had already been predicted a few months ago. With the US currency so low and the Japanese yen so hot, it was bound to happen. Predictions? Let’s wait and see what other Central banks will do. In the meantime buy gold and silver regardless of fluctuations. Prices can only go up now.