Fed to buy $350 billion U.S.long term Treasuries

Saturday, March 21,2009 11:00am.

On Wednesday the U.S. Federal Reserve announced that it was going to extend its program of buying U.S. government debt and plans to purchase 350 billion worth of longer term 2-10 year treasuries as well as purchase up to 750 billion worth of mortgage loans. The intention is clearly to lower interest rates   and ensure that the stimulus is effective by injecting liquidity into the economy. This is ,as I have stated in an earlier post and quite frankly advocated as a policy tool for the past 25 years, smart policy on Ben Bernanke's part. There is no risk of it creating inflation, although once the economy recovers, some of the liquidity will need to be withdrawn by reselling some of the debt into the private markets.

In terms of the U.S. broadly defined money stock M2 which is of the order of 8 trillion dollars 350 billion is a small percentage and without any inflationary risk.

As of August 31, 2008 the Fed owned 480 billion dollars of U.S. marketable debt securities.(U.S. treasury, Bureau of Public Debt,distribution of holdings) So even with this addition the total owned by the fed is less than a trillion dollars or roughly 10 % of M2. Given the analysis I have done of the Canadian experience with debt monetization over a period of 40 years there is little or no risk of inflation but a positive possibility of having the newly injected liquidity facilitating the impact of the stimulus.

The measure had an immediate positive effect both upon interest rates and the stock markets and allowed the small boomlet of the past few days to play a little further.

There is also some good news on the retails sales front in Canada. January's sales were again better than expected.It is too soon to declare victory over recessionary forces but another month or two of this trend will be a very welcome development.