Running short on ammunition at the Fed?

July 15, 2009

Barring another serious economic stumble, it seems that the Fed is not going to offer much more credit easing than already planned. The minutes of the June meeting of the FOMC suggested a solid resistance to stepping up purchases of either mortgage backed securities or Treasury bonds.

On Treasuries, the committee argued that a small increase in Treasury purchases would do little to push down rates. Meanwhile a large increase could heighten fears that the Fed intended to monetize the government’s debt.

I have to admit to being a little disappointed. Even after completing its $300 billion of purchases the Fed will own just a small fraction of the more than $6 trillion market. They have enough credibility to push through more purchases without raising concerns. Another burst of sub-5 percent mortgage rates could provide much needed relief for the housing market and ease pressures on household budgets.

Under normal circumstances the Fed could afford to be cautious. But I suspect that the fiscal stimulus that has yet to percolate into the economy will have only minimal effect. Much will be offset by cutbacks at the state level.

This leaves the Fed on its own. They can afford to give the economy one last shot in the arm.

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