Wednesday, June 3, 2009

Bernanke warns on deficits as Treasury rates rise: Part II

Bernanke also doesn't seem to understand that it is the Fed that sets interest rates! How amazing is this???

If Bernanke wanted the long bond yield at zero, tomorrow, it would be a done deal. He just needs to understand that.

Under its authority the Fed has unlimited ability to credit reserve accounts in the banking system. In other words, it has unlimited ability to buy--Treasuries, mortgage backed securities, stocks, anything.

So bringing rates down is not only a "no-brainer" for the Fed or any other central bank of a government that issues non-convertible free-floating currency, it is what central banks do, naturally.

In contrast, raising rates is a lot tougher for the Fed because it needs something to sell and it doesn't issue its own securities. (Although that is currently under consideration.)

That's why central banks usually like when rates are rising on their own, as long as economic conditions are stable or improving.

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