Wednesday, June 10, 2009

Does the Fed need a bazooka in its pocket?


We tongue-in-cheek believe that the Fed needs to take the approach from former Treasury Secretary Paulson’s quote at a July 15 Senate Banking Committee meeting that “if you have a bazooka in your pocket and people know it, you probably won’t have to use it.”


-Quote form Barclay's Bank research report on the need for the Fed to have the ability to buy more Treasuries


Do we need the Fed to have more power to add Treasuries to their balance sheet? I don't think so. The Barclay's argument is that if the Fed could be able to buy more Treasuries they will be better able to force Treasury rates down and allow for lower mortgages to help the housing market. Clearly, the cost of mortgages have increased and we are back to pre-Lehman levels. This will slow refi's which is a significant gain to borrowers. However, it is not clear that the Fed needs to place more assets on their balance sheet.


The only reason for allowing for a bigger bazooka would be to eliminate the uncertainty of whether the Fed will or will not ask for more. The overhang of policy uncertainty hurts the market, but adding more Treasury buying power also will not be helpful. Increasing Treasury purchasing power for the Fed would further fuel the flames of monetization arguments. Currently, the market needs to see some signs of monetary discipline.

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