Fed in Bond-Buying Binge to Spur Growth

The printing press is on. Fed is printing money to buy $300bn treasuries from banks to increase the money supply in private credit markets. With the Fed funds rate down to 0.25% there are hardly any choices left for the Fed to give a jolt to the economy. This is the last resort. A FT article gives out the reasons why a seemingly unthinkable act a few months ago is happening now.

1. Latest economic data is not very encouraging. Fed thinks US will be going through a long recession
2. Obama’s Fiscal stimulus plan is slow to take off. Some thing should be done by central bank when fiscal policies are slow
3. Initial worries of inflation are set aside when the data suggests to Fed that there will be a long deflationary economy
4. UK recently had a good experience in pushing down the long term gilt yields after doing a similar operation.

The fashionable word Quantitative easing will be discussed more often as the Fed starts printing its money. As Warren Buffet wrote in his latest annual report, US will have to face unpleasant choices once the economy starts picking up, in the name of Inflation and depreciating dollar. A recent Reuters blog suggested that Fed’s balance sheet is approaching $4 trillion, a third of US economy. With such a huge balance sheet Fed will have problems in containing inflation in future.