Thursday, March 28

The crisis of Europe buys time for fed

The crisis of Europe buys time for fed
| By Jim Jubak

A renewed flight to the safety of Treasury bonds euro fears would keep the rally going and the Fed time for an exit strategy to give.

As you unfold another act in the eurozone debt crisis/farce in Cyprus to see, please remember: the longer the eurozone debt crisis rolls, the better the chance that the Federal to shrink its balance sheet, will be reserve without the economy cratering.

Unfortunately for the Fed (but fortunately for people, that lives in Spain, Italy, France, etc.), it is unlikely that the debt crisis in the euro zone over the long pull enough, give the Federal Reserve all the time he needs.

But, ya never know hey. European Heads of State and heads of Government have shown a remarkable ability to drag the crisis with partial solutions, which result in discussion not solutions at all. Maybe they can stretch out the crisis for three or four more years.

Finally managed to turn this group, which should be a crisis for the offshore money would, Cypriot banks to a referendum--filled the survival of the euro zone. And that a "solution" produced late Sunday night the Cyprus crisis, which was carried out in the not-so-long crisis in Spain, Italy, France and, most of all Greece, even worse.

Maybe there is hope for the Federal Reserve - and the US economy, after all. At least if the eurozone fed - debt crisis and U.S. equities and bonds prices-valuable support until September.

Here is the problem: the Federal Reserve, provision of liquidity in the days after the collapse of Lehman Brothers, stimulate the economy in the recovery from the financial crisis, to revive the real estate market, and finally in an effort to turn a faltering economic recovery in a self-sustaining phase of growth, has to be plump, printed money.

Jim Jubak

Trillions of dollars.

The fed the actual functioning is much more complex than Jackson's print and drop from helicopters. The Fed is buying bonds on the financial markets. This gives bondholders cash use to buy new bonds or shares or on everything from BMWs to spend, the expansion of the factories. How does the fed for these assets pay? The Fed needs to do anything quite so specific or primitive as printing money. It easy credits the account of the seller with the purchase price. Meanwhile, therefore everything is summed up, the Fed adds bonds was one of its balance sheet. This means that you can track the amount of money, which add the amount of money the Federal Reserve balance sheet is based on the Fed.

Reserve balance was the Federal $3.1 trillion at the beginning of March. A giant $2.6 trillion increase in the balance sheet is $488 billion on January 19, 2011. $2.6 Trillion is the "created" and added in two years in the United States and the global financial system.

The conventional wisdom says that the Federal to reduce this footprint, sooner rather than later must begin reserve. Sometime soon, says this wisdom needs to slow down the fed and then finished its current program each month $85 billion of Treasury bonds and mortgage-backed securities to buy.

Speculation is that the Fed might stop, that the purchase of early 2014. At this point the Fed will have added $765 billion assets in its balance sheet push that total $4 trillion in close by.

In the next step the Fed would begin perhaps as early as the year 2014, to reduce its balance sheet by some of these Treasury bonds and mortgage-backed securities for sale.

The conventional wisdom says that two things will happen when the federal reserve its balance sheet not reduce in relatively short time. First is that $3 trillion reserve in the money supply have pumped the Federal end of 2013, to drive inflation because a relaxing business eats up excess capacity starts. Second rising inflation and the Fed will push up selling its portfolio interest rates. It will be difficult, conventional wisdom says that $3 trillion in Treasury bonds for sale and mortgage-backed securities back into private hands without investors 'extra' booty from some as a reward.

At best, higher interest rates and higher inflation as a drag on the U.S. economy will act. In a scenario with something worse higher interest rates and higher inflation in growth would choke off enough to the economy cut. In the worst case, higher interest rates would increase the cost of financing the large federal debt the kinds of budget cuts and perhaps even raising taxes, the cuts in the recession in the euro zone would have made to a degree that require.

Some economists who have studied the structure of the Fed's balance sheet, believe that this scenario could get nasty deed. In an effort to drive the medium-term interest rates and the housing market jump start by lowering mortgage rates. the Federal Reserve has focused its purchase of Treasury bonds in medium-term maturities. Almost half of the Fed $1.78 trillion portfolio of Treasury bonds is in a period of five to ten years. So big the Fed are the enterprises these runtimes that some economists and bond-market analysts fear that the Fed has become the market for these terms take effect.

Sell anyone attempting this part of the portfolio, they fear, would cause very quickly to move interest rates up, because there are simply not enough buyers all this care without this kind of absorb the increase in yield.

In the last week-especially in the last remarks during the Fed Chairman Ben Bernanke Humphrey Hawkins to the Congress-the Federal pointed out reserve, that it thinks at least an alternative to the conventional wisdom. The Fed thinking seems to be that selling out to hold the portfolio on a slow enough prices to damage the economy at a minimum would long that just wait the Treasury bonds in the portfolio to tyres and then not rolling over the proceeds in new Treasury purchases not significantly more time it would take would the Fed balance sheet on something like the pre-crisis level to reduce.

That I seen estimates have the portfolio, the tires not older than the Fed schedule would add two or three years.

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