Wednesday Sep 28, 201103:57 PM GMT
Bernanke buys Treasury bonds, Geithner sells them
Wed Sep 28, 2011 3:59PM
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Tim Geithner (L) and Ben Bernanke

Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner may be working at cross purposes as one buys Treasury bonds and the other sells them.

 

The Fed plans to purchase $400 billion of longer-dated Treasuries in a bid to reduce yields. At the same time, the Treasury Department is selling more long-term securities to decrease its reliance on short-term borrowing. That strategy puts upward pressure on interest rates by adding to market supply.

 

The reason for the conflicting approaches: Geithner wants to reduce the amount of debt that the Treasury has to roll over each month, a task made more urgent after the U.S. was driven to the brink of default in August. Bernanke is seeking to prevent the slowing economy from suffering a Japanese-style lost decade with growth averaging under 1 percent per year.

 

"The Fed is worried about the U.S. becoming Japan, while the Treasury is worried about the U.S. becoming Greece," said Louis Crandall, chief economist at Wrightson Plc, whose Jersey City, New Jersey-based company is a unit of ICAP Plc, the world's biggest broker of trades between banks.

 

As a result, the central bank's action may have "a pretty limited effect" on long-term interest rates and the economy, according to James Hamilton, a professor of economics at the University of California at San Diego.

 

"We shouldn't have any illusions that it will radically change things in any great hurry as far as the economy is concerned," said Hamilton, co-author of a paper last year on "the effectiveness of alternative monetary policy tools."

 

FACTS & FIGURES

 

The Fed said Sept. 21 it will carry out its purchases of $400 billion of Treasuries with remaining maturities of six to 30 years by the end of June 2012. It will sell an equal amount of debt with maturities of three years or less. Bloomberg

 

In August, Lawrence Summers, former top White House economic advisor, Nariman Behravesh, chief economist at IHS Global Insight, and Martin Feldstein, a Harvard economist, all warned that the U.S. economy could slip into another recession. LA Times

 

In July, Goldman Sachs estimated if the jobless rate will be kept over 9 percent and rising, "the economy will enter a new recession within six months." Fox Business

 

Together with interest on the national debt, Social Security, Medicare and Medicaid are on course to consume the entire federal budget as soon as 2025. Orlando Sentinel

 

ARA/SM/HJ

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