23 Mar 2009

Shocker: Government Plan to Fix Economy With Inflation Not Working

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This CNBC article explains:

The Fed’s bid to lower long-term interest rates on home mortgages and corporate debt is already running into trouble.

In the aftermath of last Wednesday’s announcement that it would buy back $300 billion of 2-10 year Treasury securities, yields on benchmark 10-year notes were cut 51 basis points, from 3.02 percent to 2.51 percent in a matter of minutes.

But rates have since crawled up on Thursday and Friday, and show no sign of falling today, leaving the market just 36 basis points lower than before.

And I liked this part:

The Fed is trapped. The current buy back program is too small to have more than a symbolic effect. Expanding it, though, would trigger fears about inflationary financing and risks bringing on the rise in bond yields and collapse in confidence and the currency the Fed is desperate to avoid.

I have been saying this more and more in the last couple of weeks: Everyone says, “Bernanke will have to suck those reserves out of the system once the recovery begins.” But what happens when unemployment is in double digits and CPI is rising at more than one point per month? People are acting as if that’s impossible. We’re back at the pre-1970s Phillips Curve consensus.

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