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Federal Reserve Cranks Up the Printing Press…Again

Fed to Inject $1.15 Trillion More into Credit Markets
by Adam Price |
March 20, 2009
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San José, CA – On March 18, the Federal Reserve announced that it would inject an additional $1.15 trillion into credit markets. With short-term interest rates already close to zero percent, the Federal Reserve will try to lower long-term interest rates in an effort to boost the economy. The Fed will buy another $750 billion in bonds backed by mortgages guaranteed by Fannie Mae and Freddie Mac, $300 billion in long-term U.S. government treasury bonds and another $100 billion in bonds issued by Fannie Mae and Freddie Mac.

Following the outbreak of the financial crisis last year, the Federal Reserve bought almost $50 billion in bonds issued by Fannie and Freddie, and $225 billion in mortgage-backed bonds. But mortgage interest rates barely budged and the housing market continued to tank. So the Fed will buy three times as many more bonds in the hope that this will increase the price of bonds, which should lower mortgage interest rates. The Fed hopes that this will help more people to buy homes, stabilize houses prices and limit the growing tide of foreclosures.

The Fed is also buying longer-term U.S. government, or Treasury, bonds for the first time since the early 1960s. The huge U.S. government budget deficit this year, which will be around $1.5 trillion, means a huge number of bonds must be sold to borrow the money. This has started to drive up interest rates, which the Fed hopes to reverse by buying more bonds. The Federal Reserve was following the example of the Bank of England, the Fed’s counterpart in Britain, which has begun to buy government bonds, forcing down interest rates.

The Federal Reserve will create money through its electronic printing press to buy all of these bonds. With the supply of money already rising at a 24% rate the last six months, the latest Fed action further raises the danger of inflation in the future. Already inflation is on the rise this year after prices fell late last year. But the Fed seems to feel that it has no choice, as it no longer sees an economic recovery happening this year. While the Fed is right to fear the deflation, or falling prices, that helped ravage the economy in the 1930s, it may be laying the basis for a return to stagflation, or inflation and recession, common in the 1970s.

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