The Gloves Come Off At The Fed

Well, they’re about to make it official. The Fed will stop at nothing to make sure they “save” the markets. So far they’ve been unable to stop the deleveraging and get things moving, so they’re pulling out all stops:

The Federal Reserve may today reduce its main interest rate to the lowest level on record and prepare for one of the boldest experiments in its 94-year history: using its balance sheet as the key tool for monetary policy.

The Fed’s Open Market Committee will probably cut the benchmark rate in half, to 0.5 percent, according to the median of 84 forecasts in a Bloomberg News survey. The central bank may also signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets.

Bernanke, a scholar of the Great Depression, indicated in a Dec. 1 speech that policy makers will need to focus on “the second arrow in the Federal Reserve’s quiver — the provision of liquidity,” including options such as purchasing Treasuries to inject more cash into the economy.

A formal commitment to expand the balance sheet would constitute “the most extraordinary policy approach we have seen” so far, said Brian Sack, a former economist at the Fed’s Monetary Affairs Division, who is now senior economist at Macroeconomic Advisers LLC in Washington.

Emphasis added for a very strong reason. In early September, that Fed balance sheet was reading about $900B. It’s now up to about $2.29T. And not they’re actually admitting they want to expand it, which can only mean we’re looking at another enormous addition.

All this so far, and they’re throwing more money around, and it doesn’t seem to be improving. Anyone else get the sense that the saying that best explains the situation is “pushing on a string”?

  • Paul

    Why doesn’t the Fed just buy the US government? I mean, when you buy a business, you generally pay a 1-year premium. The GDP just so happens to be that magical number on which to establish a price for the US. Sell the US to the Fed at GDP. They’ll gut it, sell off anything of value, and resell it to China, or Japan, a nation that happens to have enough money on hand to do such a crazy thing.

    /sarcasm triggered by annoyance

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  • Clint

    They may be pushing on a string, but I remain optimistic. After all, Ben has opened up his toy box and has found all sorts of “tools” in there he can use to fix the economy.

  • Quincy

    Once again, the Fed gets it wrong. The long-term health of the economy at this point requires that the deleveraging be allowed to happen. There is some value to slowing it down by injecting liquidity, but trying to prevent it entirely is wrongheaded.