Blogs & Comment

Another monster pump priming coming?

Federal Reserve chairman Ben Bernanke and some close allies at the Fed are said to be quietly mulling a fresh burst of asset purchases that could double the Feds balance sheet to $5 trillion (U.S.). But they probably wont get enough support to proceed down this uncharted path until the economy deteriorates further and persuades the Feds regional chiefs to relinquish their fears of inflation.
Only recently, some Fed regional chiefs were calling for moves to drain monetary stimulus by selling a portion of the Fed’s $1.75 trillion of Treasuries, mortgage securities and agency bonds bought during the crisis. So it doesnt seem they will immediately give their backing for further asset purchases at this stage. Bernanke will have to wait until everybody can see the economy is nearing the abyss, reports Ambrose Evans-Pritchard, International Business Editor for Britains Telegraph newspaper.
We may get there soon enough. Here are some current signals in the U.S:
new home sales in May fell to an all-time low of 300,000 10-year Treasury yields areback down to 3%, their lowest since April, 2009 net fiscal stimulus of 2% of GDP in 2010 will reverse to a net withdrawal of 2% in 2011 government measures to rein in banks could further crimp lending M3 money supply has contracted at 7.6% annualized over the last three months unemployment still high at 9.7% manufacturing capacity utilization very low at 71.9% ECRI leading indicator is pointing to contraction Baltic Dry Index dropped 40% in a month
This time around, perhaps the Fed will buy a lot more assets from the non-bank sector and put money directly in the hands of people to spend. Buying assets from the banks would be more pushing on the string, at least until the Fed stops paying banks substantial interest ratesto keep excess reserves with them.