The Federal Reserve can't really lower interest rates any more -- they are already effectively at 0%. So the tool left to the Fed in an effort to increase liquidity and try to get the economy moving again is quantitative easing.
$1.25 trillion in new purchases
The Fed is going on a shopping spree, prepared to spend more than $1 trillion. Here is a breakdown of the shopping list:
- Mortgage backed securities: $750 billion
- Agency debt: $200 billion
- Long-term U.S. Treasuries: $300 billion
It's all about getting the money moving in an effort to stimulate the economy. But it brings up questions about funding this massive effort. More than $11 trillion has already been committed to economic stimulus efforts so far, and things are starting to look a little scary.
On top of concerns about funding this particular spending effort, there are additional concerns about who will continue to hold U.S. Treasuries. China is diversifying, and Japan may not want to keep holding onto U.S. assets that are increasingly diluted in value. GFT's Boris Schlossberg reports on the possibly positive outcome for the U.S. economy:
Fearing that US may not be able to attract enough foreign capital to
finance the ambitious fiscal spending plans put in place, the Fed
effectively made itself the buyer of last resort for US Treasuries. So
far the gambit has worked with yields on the 10 year bonds dropping by
nearly 50 basis points in one day. If the Fed can maintain US bonds
yields at the current low levels, it would succeed in minimizing the
cost of financing the massive US fiscal deficits and more importantly
will be able to monetize most of the toxic debt in the US financial
system without triggering serious inflation.
U.S. dollar fundamentals
Irregardless of whether the efforts at quantitative easing help the economy, things are in motion in terms of U.S. dollar strength. All of this debt and spending are resulting in weaker fundamentals for the U.S. dollar. These efforts may help restore confidence and risk appetite, but that just means that the greenback will no longer be wanted as a safe haven currency in forex trading -- that desire is already waning.
Instead, forex traders will start looking at the fundamentals, and see lots and lots and lots of debt. And that means that the U.S. dollar may be weak for some time to come. Good thing our leaders actually want a weak currency...
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