Thursday, March 19, 2009


The Fed declared that it would buy as much as $300 billion of long-term treasury securities and even more in mortgage-backed securities. While the Fed has already targeted federal funds rate to 0,25 percent, the prices on US Treasury debt have soared, pushing the yield on 10-year notes from 3 percent to 2.53 percent. The WSJ reports:

The Fed will buy as much as $300 billion in long-term Treasurys in the next six months. It will increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to $1.25 trillion, up from $500 billion. The Fed also is doubling potential purchases of their debt, to $200 billion (link).

Zero-ground interest rate is a serious concern regarding the long-term conduct of the monetary policy. While the major central banks have already plummeted into a liquidity trap, it is surprising that stock markets and macro data on employment and output are not responding to the proposed policy measures. If the Fed is likely to buy more long-term Treasury securities in the following months, an unparalleled increase in government debt may occur which could deteriorate the state of macroeconomic stability which is unlikely to be mitigated by neither fiscal nor monetary policy. If the Fed really aims to tackle the economic recovery, then it should set time-consistent policy rule, declaring a stop to further policy rates with a clear and indisputable statement in mind.

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