Fed News Friday: Don’t Call it QE3…yet
August 5th, 2011
In advance of the Federal Reserve meeting on August 9th, there is an ever-growing belief that the Fed will begin a new bond-purchasing program in the near future. Given the questionable nature of QE and QE2, which didn’t stimulate the economy as expected and was a contributing factor in the dollar’s decline over the past two years, there are concerns over whether or not this new program will have any positive effects, but one thing is for sure, it’s not QE3.
The program, according to economists, will resemble a similar plan pursued by President Kennedy in 1961 called “Operation Twist”. This plan would include selling short-term Treasury securities and buying long-term securities instead, with maturities exceeding 10 years in some cases. Policymakers believe that if long-term rates were lower, with short-term rates being higher, the economy could be given a jump-start without sacrificing the dollar’s stability (or what’s left of it). The plan would also hope to increase the maturity of Treasury bonds at the same time to decrease rapid turnover.
This plan won’t happen right away, though. Fed Chairman Ben Bernanke said that he would only buy bonds if there was a risk of deflation, which would make exporting goods difficult, and wages would decrease. However, the Fed may be forced to act sooner than it may like if fears of a double-dip recession turn out to be real. According to Vincent Reinhart, the former head of the Federal Reserve’s Monetary Affairs Division, the chances of a new recession are at 40% currently, largely due to market instability and slow job numbers.
One proposal for a Fed-led market fix came from investment banker Brian Kelly, who proposed the Fed “buy single-family homes” to help the housing market. We all know what that will lead to eight years down the road.
