Federal Reserve Launches Qe1.5.

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As expected, the US Federal Reserve, last week, told the markets that it intends to reinvest the proceeds of maturing agency debt into long-dated US Treasury bonds as a way of infusing the economy with more money. The maturing agency debt refers to redemptions of loans held within the assets the Fed purchased from Fannie Mae or Freddie Mac as part of its first foray into quantitative easing in 2009. The Fed will now use these funds to buy 10 and 30yr US Treasury bonds from financial institutions in the hope that they will in turn feel emboldened enough to lend more to businesses and consumers.

Mann International highlighted the apparent U-turn by the Fed in a client note. Reportedly, it read, Only a month or so ago, the US Federal Reserve was doing its level best to convince anyone who would pay attention that it remains a prudent and responsible central bank by experimenting with repos as a way of draining the liquidity it created from the financial system. Now, after a slew of poor economic data and some rather puerile calls for more stimulus, the Fed has bought itself some more time.

The investment boutique said that it was more or less certain that, before the end of 2010, the Fed will have returned to what it calls full-blown QE and, in doing so, taken the next step towards the devaluation of the US dollar. Thats not the worst of it, said a Mann International analyst. The disappointment is that the first round of QE didnt work. Sure, the money was created but much of it found its way into the equity or commodity markets rather than the consumers and businesses it was intended for. Why should this time or the next be any different? she concluded.

The firm maintains its view that as long as job security remains a worry and home values continue to fall, consumers will not feel confident spending money. If the Fed really wants to continue down this path, it has to find a better way of getting the money into the hands of its intended targets instead of relying on the commercial banks. Short of dropping $100 bills from a helicopter, wed imagine the best way would be to give everyone a tax rebate. A big one, said a Mann International strategist.



About the Author:
Aaron Sherman
inside@yourinsidenews.com
http://www.manninternational.com



Article Originally Published On: http://www.articlesnatch.com


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