Marris asked in the comments about limits on Fed purchases. Nick Rowe recently up up a guest post by JP Koning at
Worthwhile Canadian Initiative on this. Interesting comments on the post there, too.
I thought it important enough for the purview of this blog to call attention to it here.
Read it at Worthwhile Canadian Initiative
The legal scope of Fed purchases
by J P Koning
He was looking at the wrong law. The issue isn't what the Federal Reserve Banks can purchase (Section 14 of the FRA) but what the Secretary of the Treasury can order the Fed governors to buy under the Gold Reserve Act (the key phrase, discussed further below, was added during the Nixon Admin).
ReplyDelete31 USC 5302. Stabilizing exchange rates and arrangements
(b) Consistent with the obligations of the Government in the International Monetary Fund on orderly exchange arrangements and a stable system of exchange rates, the Secretary or an agency designated by the Secretary, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary.
I'd say "instruments of credit and securities" is pretty damn broad. The IMF language is just a prefatory clause (like "a well regulated militia" in the 2nd Amendment) that doesn't actually limit what comes after since stable exchange rates are an integral part of monetary policy. Congress may have intended for Tsy to use its Exchange Stabilization Fund ("ESF") to fund these transactions, but its "designated agency", the Fed, can trade its own book (in fact, it already does).
"The ESF does not provide financing to the Federal Reserve System for foreign exchange operations. Rather, the Federal Reserve participates with its own funds."
http://www.newyorkfed.org/aboutthefed/fedpoint/fed14.html