Most have probably seen that today Bernanke committed to buying 300 billion in long-term treasuries.
I’m wondering what the fundamental differences are, as far as the consequences for the real economy, when the fed inflates by buying up longer term treasuries rather than short term treasuries. Why is it in the interest of the Fed? What difference does it make in terms of how it distorts the capital structure? Why hasn’t it always done so (buy long treauseries)?
I understand that an increased artifical demand for long-term treasuries will lower the interest rate, thus increasing the principal, but many of the other effects are hard to disentangle if you’re not familiar with finance.
Answer or references would be appreciated.
Because no one is buying any bonds. If the US government tanks, then the Federal Reserve tanks as both depend on each other to exist. So, it’s in their interest to keep the game going no matter what.
Buying longer term treasuries is probably better since it means that the Fed monetizes that debt over a more extended period of time. Besides that, it functions exactly the same as the purchase of short term treasury debt.
Usually rates on Teeasury securities are used as bench mark rates for other interest rates. So when the Fed buys up a lot of long-term Treasury securities and drives the yields down, that can also influence other longer term rates (like mortgage rates) down lower. If the Fed was buying up short-term bonds instead this would not have as much of a profound and quick effect regarding long-term interest rates.