What are the consequences of the Fed buying Treasury bonds?

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pulmano1
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What are the consequences of the Fed buying Treasury bonds?

Postby pulmano1 » Wed Nov 03, 2010 2:25 pm

Can someone explain to me what are the short and long term consquences of the Fed buying Treasury bonds?

DoingHomework
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Re: What are the consequences of the Fed buying Treasury bon

Postby DoingHomework » Wed Nov 03, 2010 8:56 pm

The Fed will be buying Treasuries, mostly long term bonds that are currently yielding about 4%. That will create demand for those bonds which should raise their price and lower their yield. If Treasuries are yielding less then all other interest rates should also come down.

On the flip side, the Fed buys those bonds with money it creates out of thin air. They simply added $600 billion to their cash entry on their balance sheet today. That extra money increases the amount of money in circulation. It should be inflationary. In fact, the critics complain that the Fed is being irresponsible because their action is inflationary and the Fed took the action precisely because it wants to create inflation to counter act deflation.

Normally they would just lower interest rates. But they have done that without effect. The cannot lower rates below zero so they are trying this.

Quantitative easing is a trick that is controversial. It has been used here and in Japan (and the UK?). It has never worked very well but has never led to the disastrous inflation that the critics fear.

If I had to make a a wild guess I would say that we will soon see 30 year mortgage rates in the low 3% range, the dollar will lose some value so that a Euro costs about $1.50-$1.60 rather than the $1.40 it costs now. The stock market will go up a little. And most of us will go about our daily lives without noticing much effect.

pulmano1
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Re: What are the consequences of the Fed buying Treasury bon

Postby pulmano1 » Thu Nov 04, 2010 7:39 am

Thanks for the reply. I was flipping through the TV yesterday and one of the pundits was painting a doom and gloom scenario about this. It seems like a last ditch effort to keep from having a double dip recession.

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Re: What are the consequences of the Fed buying Treasury bon

Postby Tightwad » Thu Nov 04, 2010 8:22 am

If I had to make a a wild guess I would say that we will soon see 30 year mortgage rates in the low 3% range


Boy I hope so...I'd luv to refi again. :D

It seems like a last ditch effort to keep from having a double dip recession.


The eternal optimist in me doubts we'll have a double dip. I think the election has yielded a crop of politicians that are fiscally conservative & way more free market oriented than their predecessors. I don't expect change to happen overnight but I do look for the return of hope for a better future to come to main street. Time will tell.

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Re: What are the consequences of the Fed buying Treasury bon

Postby DoingHomework » Thu Nov 04, 2010 9:17 am

Tightwad wrote:Boy I hope so...I'd luv to refi again. :D

I'm in the process of refinancing. We have intentionally let the rate float in expectation of this decision and a "good" result in the election. Looks like we got it. We'll have to see how rates move today.

The eternal optimist in me doubts we'll have a double dip. I think the election has yielded a crop of politicians that are fiscally conservative & way more free market oriented than their predecessors. I don't expect change to happen overnight but I do look for the return of hope for a better future to come to main street. Time will tell.


I'm an independent. I'm not wild about the policies of either side. We need to cut spending but we also need to raise taxes. Unfortunately both parties have focused so much on message, dogma, and getting re-elected that we no longer have statesmen (or women) that work for the good of the country.

I frankly don't think the current crop is any better. In all the gloating and wound-licking there is very little discussion of how to work together to address the economic problems of the country. Until one side agrees that we need serious cuts to everything - entitlements, social programs, and defense, and the other side agrees we need to raise taxes, there will be no progress.

We are not in a downward spiral, we are stuck in the mud. Eventually the economy will recover but I don't think you will see the growth rates we've had for 20+ years. I think it will creep along like it did in late 40s through early 60s. Japan is about 10-15 years ahead of us in the cycle. Even though the pundits all say we are different than Japan, you can almost lay the events and outcomes side by side and predict what will happen next here! It's not pretty but it's not too ugly either.


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