Federal Reserve intends buying up to $300 billion worth of long-term Treasury
Amid the obvious rage against AIG for paying its employees more than $165 million in bonuses, a last week rather atypical announcement by the Federal Reserve took a backseat - that of buying long-term Treasury bonds up to a worth of $300 billion!
Though it a fairly regular move on the part of the Federal Reserve to buy and sell short-term Treasury bills to lay down the overnight federal funds rate, it is quite unusual for it to interfere with long-term Treasury, allowing the market to set long-term rates.
Except for a diminutive incidence during the 1960s, termed 'Operation Twist,' the Fed has not bought long-term Treasury since 1952, not without reason though - as Howard Simons, a strategist with Bianco Research puts it: "It's as inflationary as hell."
Obviously then, the Fed announcement is somewhat disquieting. Its decision to buy the long-term Treasury would give additional leeway to government spending, with a new, standing by buyer for its securities.
While it is being hoped that the Fed's bold move may help the country out of the downturn without igniting unwarranted inflation, William Poole - ex-president of St. Louis Fed - has expressed the concern that it would reduce the Fed's flexibility to adapt to rapidly-changing conditions. Poole said: "I belive this is an unfortunate and dangerous policy the Fed is getting into."