Fed Meets Today to Discuss Quantitative Easing

by Marilou Long on August 10, 2010

in Credit Crisis,Residential Real Estate

All eyes are on the Fed today as the Governors meet to discuss whether or not to resume quantitative easing.  The European debt crisis in the spring and the continued weak employment numbers in the US have turned their focus back to deflationary pressures in the economy.

From Ed Yardeni’s Morning Briefing today:

“There is a widespread myth that reserves are cash that banks can lend out. That is not the case. Only the Fed can determine the amount of reserves in the financial system. It does so through open market operations, which add and drain reserves through purchases and sales of securities. Banks lend their deposits and managed liabilities, not their reserves. This explains why banks are “sitting” on nearly a trillion dollars of reserves, earning only 0.25% from the Fed, rather than lending them out at much higher rates in loan markets.

Today, the FOMC is expected to vote to resume its QE policy after suspending it in March, having purchased $1.25tn of Agency debt and MBSs since QE 1.0 was started at the beginning of 2009. Let’s say the FOMC decides to buy another trillion in such securities and US Treasuries. If it was matched by an identical increase in reserves, the major stimulative impact would be to push bond yields closer to zero. It might also create a relative shortage of such debt, increasing the demand for other securities.”

There certainly isn’t any sign of inflation in the housing market.  While prices have stabilized somewhat, there is still a lot of bad debt in the system.  Freddie Mac announced a loss of $4.7 billion in the second quarter and is seeking another $1.8 billion in federal aid.  Freddie and Fannie have received a combined total of $148.3 billion in federal aid since April of 2009.

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