Message: Fed To Launch “Rate Peg Instead Of QE

Trial Balloon For Next Crisis

(excerpts) During the next crisis, when 0% short-term interest rates are no longer enough to stimulate the economy, the Fed might announce a target for slightly longer-dated interest rates, such as one-year rates, Brainard said. And it would buy just enough securities with those maturities, to bring the one-year yield down to the target range. And if more stimulus is needed, it might target two-year rates, she said:

Under this policy, the Federal Reserve would stand ready to use its balance sheet to hit the targeted interest rate, but unlike the asset purchases that were undertaken in the recent recession, there would be no specific commitments with regard to purchases of Treasury securities.

And here Bernanke explains how this form of QE would unwind automatically:

Moreover, any securities that the Fed bought under the program would mature by the terminal date, leaving no lasting effect on the Fed’s balance sheet. This “automatic exit” is an attractive aspect of the approach.

This rate-peg approach to QE would not be designed to inflate asset prices, unlike classic QE which was specifically designed to inflate all asset prices in order to create the “wealth effect.”

Instead, a rate peg of this type is designed to make borrowing cheaper along certain parts of the yield curve, while minimizing the amount of securities the Fed would have to buy to do this. And with the “automatic exit” feature, it would not cause the lingering issues classic QE is now causing. Wall Street hype artists and assorted QE-mongers that have been calling for QE for months would be deeply disappointed with this rate peg approach instead of proper tried-and-true QE.


SideNote: So much for free markets, but then we already know there hasn't been a free market for many years. GRIM


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