Wednesday, March 07, 2012

Following the wrong recipe...

...the Fed is following the Japanese recipe for combating the lack of aggregate demand and the risk of deflation.

Unfortunately, they are going down what appears to be the traditional Keynsian route...with the results somewhere between "useless" and "counterproductive". Sterilized QE is yet another asset swap whose only purpose will be providing the Fed POMO with something to do, and provide future members of the Eunuch class with data points from which to write vacuous post-mortems of Fed policy.

from the WSJ:

Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.

Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed's previous efforts to aid the recovery.

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