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."
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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