Friday, June 12, 2009
Fed to Keep Lid on Bond Buys
Reserves are functionally one-day Treasury securities, but the Fed doesn't seem to understand this and thinks that reserve balances drive inflation.
Nor does the Fed seem to understand that if it wants to target interest rates lower, it has the power, but that requires keeping reserve balances at a level that sustains the low rate. It is giving up on its rate target because of fear among certain FOMC members that this creates inflation?? Unreal!!
Japan has had zero or near-zero interest rates for 12 years and there is no inflation.
Does the Fed actually believe their inflation targeting efforts of the past two years was a success? Is it trying to do that again? My God, it's a big part of what created the housing collapse! By raising rates from 1% to 5.25% the Fed made it impossible for many people to stay in their homes. And did the Fed think that by doing that it was going to lead to more oil discoveries?
This destructive belief system is spiraling dangerously out of control.