From Bernanke's speech today in Austin.
Regarding interest rate policy, although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited.
He went on to announce an unprecedented step. The Fed will start buying US Treasuries. Ignoring the mind-bender paradox of the government's bank buying the government's bonds, this announcement led to a new race into the Treasury market.
Last week, everyone started getting out of Treasuries (finally) as the reality started sinking in that the government might be getting in over its head. The stock market had its best week in decades.
Today, Bernanke told investors that there was a new, giant customer soon to get into the game who would buy those silly Treasury bonds by the boatload.
The result? Everyone wanted a Treasury bond. To get cash to buy these new golden tickets, they sold their stocks. Dow down 700.
2 comments:
While I confess I have no understanding of money, I appreciate the delicious sounding absurdity of "the government's bank buying the government's bonds." Tell me, does such an action also produce a lot of internal paperwork? And do they stuff all those papers, bonds, and moneys in a big file box where it can all annihilate and leave a slimy bureaucratic residue? Something like that.
I'd kind of like to be involved in all this so I could get a glimpse of the paperwork. I expect it is breathtakingly beautiful.
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