Bernanke May Seek New Tactics as Fed Rate Nears 1%

[Feenix566]

Bernanke May Seek New Tactics as Fed Rate Nears 1%

By Craig Torres

Oct. 23 (Bloomberg) -- Federal Reserve officials are likely to bring interest rates down so aggressively over the next few months that they will have to search for fresh tactics to continue easing credit.

The Fed's Open Market Committee will probably reduce the benchmark federal funds rate by half a point next week to 1 percent, the lowest since May 2004, according to futures trading. The official rate has never been lower since the Fed made it an explicit target in the late 1980s.

Further cuts below 1 percent could turn Fed Chairman Ben S. Bernanke's focus away from the main rate and toward more use of alternative tools. Those might include increasing its holdings of mortgage bonds to lower costs for homebuyers and purchasing securities directly from the Treasury in order to pump more cash into the economy, Fed watchers said.

``If there is need for more stimulus, the Fed will buy up government debt'' to keep borrowing costs low, said Adam Posen, deputy director at the Peterson Institute for International Economics and a co-author with Bernanke. That's tantamount to ``turning government debt, as it is issued, into money.''

Bernanke, 54, has already thrown the central bank's balance sheet into action in unprecedented ways. Working with the New York Fed, the Board of Governors has rolled out 11 new programs aimed at absorbing risk or making dollars available when banks don't want to loan.

Assets Doubled

The result: The central bank's assets, which include a loan to insurer American International Group Inc. and a pool of investments once held by Bear Stearns Cos., more than doubled to $1.772 trillion last week from a year-earlier total of $873 billion that comprised mostly Treasuries. The latest weekly figures are scheduled for release at 4:30 p.m. in Washington.

There's more to come. The Fed announced this week a backstop for money-market mutual funds to which it will commit another $540 billion. A commercial-paper program approved Oct. 7 could buy up to $1.8 trillion of securities.

``The net effect of these facilities has been a truly staggering pace of growth in the Fed's balance sheet,'' said Jan Hatzius, chief U.S. economist for Goldman Sachs Group Inc.

When the Bank of Japan fought deflation and a banking collapse earlier this decade, its balance sheet ballooned to more than 30 percent of gross domestic product as it pumped money into the economy, Hatzius said. He predicted ``further rapid growth'' in the Fed's, which is now equal to 12 percent of U.S. GDP.

`Helicopter Ben'

As a Fed governor, Bernanke did research on alternative policy tools between 2002 and 2004, when U.S. central bankers last cut the benchmark rate to 1 percent. Traders nicknamed him ``Helicopter Ben'' after a 2002 speech that referenced Milton Friedman's comments comparing such unorthodox methods to dropping money from a helicopter.

Vincent Reinhart, the Fed's director of monetary affairs at that time, said Bernanke's policy activism, which contrasts with his predecessor Alan Greenspan's almost exclusive use of the federal funds rate, derives from the chairman's research on policy errors in the Great Depression and during Japan's rolling recessions of the 1990s.

``He saw what we viewed as an obvious policy failure and it was in the ability of human reason'' to fix it, said Reinhart, now a scholar at the American Enterprise Institute.

http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=a0dn5p1E9ilY

Are you worried about the price of gold going down? I'm not.

 

[jclay2]

If this crisis worsens at all, expect new government programs by the fed and the treasury daily. Every time the markets go down, a new government program is started. I wouldn't expect anything else but more socialism coming from these guys.

 

[HOLLYWOOD]

So the ARTIFICIAL LOW years of "Cheap" credit by Alan Greenspan and the Colluding Government/Banking Conspirers in their Inflationary "Money For All Scheme", have Bernake and his Bafoons readied to Expell the last of the Aspirins in the bottle.


What the U.S. Federal and State governments are NOT telling US and the COMOTOSE MSM don't inquire into... there are 100's of BILLIONS of ARM's and Subprime Mortgages throughout the country that are about to RESET, UPWARDS!

This is the DISASTER they are attempting to Squelch.

 

[Truth Warrior]

Ben apparently didn't LEARN a THING from Japan. You can't push on a string. DUH!!!

 

[Dr.3D]

What the U.S. Federal and State governments are NOT telling US and the COMOTOSE MSM don't inquire into... there are 100's of BILLIONS of ARM's and Subprime Mortgages throughout the country that are about to RESET, UPWARDS!

This is the DISASTER they are attempting to Squelch.

Especially with employment falling.

 

[gonegolfin]

http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=a0dn5p1E9ilY
From the article:
"Further cuts below 1 percent could turn Fed Chairman Ben S. Bernanke's focus away from the main rate and toward more use of alternative tools. Those might include increasing its holdings of mortgage bonds to lower costs for homebuyers and purchasing securities directly from the Treasury in order to pump more cash into the economy, Fed watchers said."

The Fed cannot purchase securities directly from the Treasury.

From the article:
"Vincent Reinhart, the Fed's director of monetary affairs at that time, said Bernanke's policy activism, which contrasts with his predecessor Alan Greenspan's almost exclusive use of the federal funds rate, derives from the chairman's research on policy errors in the Great Depression and during Japan's rolling recessions of the 1990s."

Bernanke's policies until a little over one month ago have been policies of swapping debt. Since that has not worked, the policy has shifted to one of quantitative easing, which obviously directly impacts the federal funds rate ... with the addition of a floor on the federal funds rate implemented by the payment of interest on excess reserves.

Brian

 

[gonegolfin]

Ben apparently didn't LEARN a THING from Japan. You can't push on a string. DUH!!!

Which is why price deflation continues to be a risk.

Brian

 

[Truth Warrior]

which is why price deflation continues to be a risk.

Brian

Agreed!

 

[Aratus]

tis my mid-morning caffinated bump! ...and bernanke now backs obama?

 

[Mitt Romneys sideburns]

New tactic? Does that tactic include his resignation?

 

[SevenEyedJeff]

I wonder if the next rate cut is going to be another coordinated global cut like last time.

 

[gonegolfin]

I wonder if the next rate cut is going to be another coordinated global cut like last time.

From my perspective, the Federal Funds target rate has been implicitly cut to about 1% already (and arguably, a little lower than that).

Brian

 

[Knut Schreiber]

In the next crisis Bernanke will be right there with Japan and The Great Depression as example of policy failure. The only question is when people will realize that not "wrong" policy is the reason for a crisis, but policy interference in marktes itself is the problem.