The Bubblemeister panicking?

[Henry C.K. Liu]

In principle, the Treasury and the Federal Reserve Bank system have separate
objectives.
The Treasury's function is to manage the cost of the nation's indebtedness.
It balances the apportionment of long, medium and short term instruments to
achieve the lowest cost in response to the governments overall financial
needs.
The Fed's function is to manage monetary policy for the good of the economy,
two primary elements of which being interest rate and liquidity targets,
essentially to fight inflation and moderate unemployment.
Both the Treasury and the Fed "play" the credit markets, but with different
aims that are not only not identical, but often at odds.
That is why it is difficult to discern the Fed formula of intervention because
it is dynamically affected by conditions in a market in which the Treasury is
among the biggest participant, (biggest until the emergence of hedge funds and
the growth of structured finance.)
The OTC derivative market is several time the federal debt (5?) and growing,
making the Treasury a smaller player by the month, especially with the Federal
budget shrinking, which is another unintended consequence of a Federal
surplus.

Henry C.k. Liu

Henry C.K. Liu

Brad De Long wrote:


> >
> >In response, it appears that the Fed has been making coupon passes
> >(outright buying of Treasuries, essentially printing of money) at an
> >unprecedented rate: ten since 4/19, including two today for a total of
> >$1.6 billion. A couple of questions:
> >
>
> I have never understood how the Fed decides where on the yield curve to
> intervene--whether to limit its purchases to the short-term Treasury bills
> that are near perfect substitutes for the Federal Funds that it says it is
> watching, or to buy and sell longer maturities...
>
> Brad DeLong