According to Federal Reserve Board Vice Chairman Donald Kohn, government and mortgage debt purchased by the Federal Reserve may provide a huge boost to the economy.
A $1 trillion boost that comes with $175 billion in additional tax revenue.
“The preliminary evidence suggests that our program so far has worked,” Kohn said in a recent speech at Princeton University, pointing to reductions in longer-term interest rates.
He added that Fed interventions designed to aid bond dealers, mutual funds and credit markets also “have been successful in supporting economic growth” by lowering rates and “preventing fire sales of assets.”
The Fed is in the process of buying $300 billion of long-term Treasuries; it has also more than doubled planned purchases of mortgage-backed securities and federal agency debt purchases.
Kohn claims that the purchases — which expose both the Fed and taxpayers to risk — will likely be loss-free because the cost of the debt is low and some will mature rather than need to be sold.
Even so, Kohn admitted that “any calculation of the effect of our asset purchases on the economy is highly uncertain,” which underscores Philadelphia Fed President Charles Plosser’s assertion that purchasing the assets will drive inflation instead.
Kohn’s remarks “would seem to underscore the possibility the Fed increases the purchases of long-term assets,” says Brown Brothers Harriman currency strategist Marc Chandler.
“This is particularly relevant for Treasuries as the Fed's purchase program was to expire in August or September while purchases of government sponsored enterprise (GSE) assets run until the end of the year,” Chandler says.
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