The Fed's stupid attempt to shift bond yields

Let's say that you really think that the Fed can shift bond yields by selling short term bonds and buying long term ones. If you really believed that, would you announce your were going to make those changes before you did it? If you announced that you were going to sell short term debt and you drove down those prices before you sold them, you won't get that much money for what you sell. If you announced that you were going buy long term debt before you did it, that would drive up the prices of long term debt and make you have to pay more money for what ever you bought.

The real problem is that we live in a massive international capital market. As the government shifts its holdings, private parties in the US and government around the world will shift in the other direction. So the bottom line is that I don't think that the Fed can do much to change prices. If they can change prices, why would they want to announce that they are doing this in advance?

The latest move by the chairman was a decision to dramatically recast the Fed's $2.65 trillion securities portfolio in an effort to reduce long-term interest rates. The Fed plans to shift its holdings so it will have more long-term U.S. Treasury bonds and more mortgage debt than previously planned. It hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector.

The shift toward longer-term Treasury securities was largely expected but slightly bigger than many in the markets had anticipated, and the action on mortgage bonds was a surprise. . . . .



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