From the FINANCIAL TIMES:
…First, the Fed could launch an “Operation Twist” on the yield curve, selling short-term Treasuries and buying long-dated bonds with the aim of driving down long-term yields. But the Fed considered buying longer-term assets last November and explicitly decided not to. Money markets would appreciate the extra short-term assets – but that may not matter enough to sway monetary policy.
Second, the Fed could cut the rate it pays on banks’ excess reserves from 25 basis points to 10bp. That again is an option it explicitly rejected last November. Since then, a new deposit insurance fee has driven down short-term market interest rates, so to cut the rate on excess reserves might further hamper market functioning.
Third might be a third round of quantitative easing or “QE3”. But imagine that the Fed bought another $600bn of assets. That not only eases monetary policy today – if the action is credible, then it locks in easier monetary policy for the eight months that it would take to carry out the purchases. If there is any doubt about inflation, then the Fed will be reluctant to tie its hands so far into the future…
Click here to read the full article.
EDITOR: These are steps considered by the Federal Reserve because Congress simply will not perform its fiscal duty of creating economic stimulus. It is like asking your dentist to remove your tonsils!
