Federal Reserve to spend $45B a month to buy bonds, links rate hike to 6.5 pct. unemployment

[brooklynite]

Source: Washington Post

WASHINGTON — The Federal Reserve will spend $45 billion a month to sustain an aggressive drive to keep long-term interest rates low. And it set a goal of keeping a key short-term rate near zero until unemployment drops below 6.5 percent.

The policies are intended to help an economy that the Fed says is growing only modestly with 7.7 percent unemployment in November.

The Fed said in a statement issued Wednesday that it will direct the money into long-term Treasurys to replace an expiring bond-purchase program. The new purchases will expand its investment portfolio, which has reached nearly $3 trillion.

The central bank will continue buying $40 billion a month in mortgage bonds. All told, its monthly bond purchases will remain $85 billion. They are intended to reduce already record-low long-term rates to encourage borrowing and accelerate growth.


Read more: http://www.washingtonpost.com/business/federal-reserve-wraps-up-2012-still-facing-high-unemployment-and-sub-par-economic-growth/2012/12/12/cea83aee-4419-11e2-8c8f-fbebf7ccab4e_story.html

[Roy Rolling]

1. Yay big banks!

If it's one thing gigantic banks need it's to borrow money from the federal government at zero percent to lend to credit card customers at 22%. God forbid they reduce that cash cow.

[RC]

2. I think that is the real reason for what they are doing.

[cthulu2016]

4. This is quite ignorant ^^^

The poster either thinks rates should be higher, or is just typing at random.

Either way, the sentiment is indefensible gibberish.

[dixiegrrrrl]

8. Has it been awhile since you read the terms of service?

The DU Community Standards state: "It is the responsibility of all DU members to participate in a manner that promotes a positive atmosphere and encourages good discussions among a diverse community of people holding a broad range of center-to-left viewpoints."

I don't think the poster deserves such a rude comment.

[cthulu2016]

10. Is there a preferred synonym for ignorant?

If you want to find a better phrasing to explain that the poster is spouting hateful right-wing trash in some demented nut-left wrapper please phrase it however you want.

Do you think interest rates need to be higher? If so, you are an absolute idiot.

There are probably positions more evil, but it would be hard to find one dumber.

[Wernothelpless]

3. The next bubble ...

The bond market ... poof! ....

[cthulu2016]

5. Thanks for spreading RW nonsense

[Dokkie]

7. Not because RW say it doesn't make it wrong

I hope you wake up and see the private bond buys are no longer buying our debt and all the action is from the FED. This is akin to a snake eating its own tail. At some point he will run out of tail to eat.

[dixiegrrrrl]

9. Absolutely.

which is one reason they will not raise interest rates.
All the action has been from the FED for quite some time now,
and they are happily buying up the banks worthless morgages.
by issuing more debt.

How long will it take the snake to consume itself at the rate of 85 billion a month Fed purchases?
Which is to say, 85 billion a month of ..debt?

[IMG][/IMG]

[cthulu2016]

11. I hope you wake up and see that your homespun economic 'common sense' is nonsensical

"At some point we will run out of tail to eat."

Sure. Probably so.

"Bonds are a bubble"

Moronic statement.

Are you saying bonds are a bubble? If so you are very foolish. If not, you are rising to the defense of a position you do not hold, which is weird.

[Dokkie]

13. In a way yes

Bond will become a bubble when it turns out the US cant pay it back. You see how the time between fiscal cliffs are getting shorter and shorter. This will inevitable lead to US defaulting, the interest payment will continue to rise and rise and the economic recovery is always going to be the next stimulus away.

I say you wake the hell up.

[Morganfleeman]

14. Absurd

A 100 basis point rise in 10 year rates (a very realistic scenario) wipes out 20% of the capital of a purchaser holding a 10 year treasury. If that's not bubble territory, I don't know know what is.

Interestingly, this is the first time QE has been announced and 10 year yields ROSE, which may lend credence (if it's the start of a pattern) to the idea that Fed policy is bordering on impotence.

[dixiegrrrrl]

16. Yes, that is what I am reading also.

[cthulu2016]

6. This is REMARKABLE (and very good) news

An overt unemployment peg is a very big deal from the Fed. They are following through on earlier pronouncements that QE3 would continue until the labor market improved and announcing a target, which is a very important thing for the efficacy of the policy set.

Explicit Fed policy drives economic activity much more than implied policy, for obvious reasons. (It is a more reliable basis for actions.)

[Morganfleeman]

12. Not Really

It has the unintended consequence of a self perpetuating retrenchment (i.e., money coming out of stocks) whenever the Maginot line of 6.5% unemployment is in sight.

In any event, each round of QE has had diminishing returns. There's no reason to believe this will be any different. And with each round of QE the more we head into unchartered territory. The Fed's balance sheet will double by 2014 and as of next year it pretty much will be financing the entire deficit. What happens when the Fed tries to unwind its balance sheet? We have no idea.

Inflating asset prices to drive people into said assets is not a good thing. It's another form of trickle down I.e., it assumes the wealth effect translates into real main street growth. We have multiple rounds of QE that do not show that this assumption holds true.

Just look at the employment to population ratio (it continues to fall) and look at real wage growth (it's NEGATIVE). QE has only helped the stock market. Let's be honest.

[MrTriumph]

15. There are a number of negative consequences of the Bush/Obama weak $ policy

Hey, everyone (one would hope) wants lower unemployment. To say this 4th phase of QE will bring lower unemployment may be wishful thinking.

Most likely: This round of QE is aimed at supporting an already high the stock market.