Fed Looking At Smaller-Scale, Open-Ended Treasury Purchases
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After the close Monday, the Wall Street Journal reported that the Federal Reserve is considering a more open-ended and smaller scale plan if it resumes the purchases of long-term U.S. Treasury securities to bolster the sluggish economic recovery, rather than another plan for massive bond purchases with a finite end, similar to the plan used in 2009 to revive the economy.
The Fed has said that the determination of deciding to step up bond purchases will come following upcoming economic data and inflationary bellwethers, after which officials might decide that no action is necessary.
The Fed announced in March 2009 that it would purchase $1.7 trillion worth of Treasury and mortgage-backed securities over a six to nine month period, a plan that was described by most Fed officials as a way to drive down long-term interest rates. This was known as the “shock-and-awe” approach.
The alternative approach that is gaining favor inside the Fed according to a report from the Wall Street Journal, the government would announce purchases of a smaller amount over a smaller period of time that would allow the agency the opportunity to examine if it needs to do more for the economy.
With the economic recovery not mirroring past situations, the Fed would leave itself more flexibility in this approach to combat the uncertainty.
A few months ago, the Fed had been talking about ways to reduce the size of its portfolio. If it decides to resume large-scale purchases, the Fed will weigh the benefits of pushing down already-low interest rates against the damage to the credibility in the financial markets.
According the Journal, Goldman Sachs is estimating that the Fed will purchase another $1 trillion at minimum, pushing the long-term interest rates down another 0.25 percentage point.
"The shock-and-awe approach is rarely the optimal way to conduct monetary policy," James Bullard president of the St. Louis Federal Reserve Bank, said. "I really do not think it is the right way to go except in really exceptional circumstances."
Bullard sees the Fed possibly announcing a plan for bond buying at $100 billion or less per month, making a judgment at each meeting as to whether additional action is needed.
The Fed has said that the determination of deciding to step up bond purchases will come following upcoming economic data and inflationary bellwethers, after which officials might decide that no action is necessary.
The Fed announced in March 2009 that it would purchase $1.7 trillion worth of Treasury and mortgage-backed securities over a six to nine month period, a plan that was described by most Fed officials as a way to drive down long-term interest rates. This was known as the “shock-and-awe” approach.
The alternative approach that is gaining favor inside the Fed according to a report from the Wall Street Journal, the government would announce purchases of a smaller amount over a smaller period of time that would allow the agency the opportunity to examine if it needs to do more for the economy.
With the economic recovery not mirroring past situations, the Fed would leave itself more flexibility in this approach to combat the uncertainty.
A few months ago, the Fed had been talking about ways to reduce the size of its portfolio. If it decides to resume large-scale purchases, the Fed will weigh the benefits of pushing down already-low interest rates against the damage to the credibility in the financial markets.
According the Journal, Goldman Sachs is estimating that the Fed will purchase another $1 trillion at minimum, pushing the long-term interest rates down another 0.25 percentage point.
"The shock-and-awe approach is rarely the optimal way to conduct monetary policy," James Bullard president of the St. Louis Federal Reserve Bank, said. "I really do not think it is the right way to go except in really exceptional circumstances."
Bullard sees the Fed possibly announcing a plan for bond buying at $100 billion or less per month, making a judgment at each meeting as to whether additional action is needed.
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