FED ANNOUNCES PLAN TO SINK $600 BILLION INTO GOVERNMENT BONDS

[I AM NOT THAT GUY 5,715]

Bernanke defends new Fed plan to aid economy

WASHINGTON (AP) - Worries are overblown that the Federal Reserve's plan to aid the economy could unleash inflation, Chairman Ben Bernanke said.

Bernanke's comments come hours after the Fed announced Wednesday that it will buy $600 billion worth of government bonds in a bold bid to make loans cheaper, spur spending and invigorate the economy.

Critics, including some Fed officials, fear that all the money being injected into the economy could ignite inflation or speculative bubbles in the prices of bonds or commodities. Bernanke said those inflation fears are "overstated." A larger $1.7 trillion program launched during the financial crisis didn't result in higher inflation, he pointed out. When the economy is on firm footing, Bernanke expressed confidence that the Fed will be able to smoothly soak up all that money without harming the economy.

Bernanke revealed his thoughts in an opinion piece scheduled to be published Thursday in the Washington Post.

The Fed needs to take the action because unemployment is too high and inflation is too low, signs of a still-troubled economy, Bernanke explained.

"We could hardly be satisfied," the Fed chief said.

The unemployment rate stands at 9.6 percent. It's been at least 9.5 percent for 14 months, the longest stretch since the Great Depression.

The "slack" in the economy—factories running below capacity and companies limiting hiring—has kept inflation historically low.

In the 12 months that ended in September, consumer prices rose just 1.1 percent. Bernanke has said the Fed would like to see inflation closer to 2 percent to show the economy is making a solid recovery.

The Fed's action on Wednesday also is aimed at nipping any deflationary forces in the bud.

"In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which contribute to long periods of economic stagnation," Bernanke said.

Deflation is a widespread drop in prices, wages and the values of homes and stocks. It can cause people to delay purchases because they feel they can buy later at lower prices. Falling incomes also make it harder to pay debts. Foreclosures rise. So do bankruptcies. Once it takes hold, deflation is hard for policymakers to break. Deflation contributed to Japan's "lost decade" of the 1990s, and the country is still battling it.

"With unemployment high and inflation low, further support to the economy is needed," Bernanke said.

http://www.breitbart.com/article.php?id=D9J91QC00&show_article=1

[Obama 2012 1,714]

Bernanke should be in prison...... along with Alan Greenspan before him......

[I AM NOT THAT GUY 5,715]

Bernanke should be in prison...... along with Alan Greenspan before him......

Elections don't matter when you are a living deity.

[SMOKE 1,426]

Bernanke should be in prison...... along with Alan Greenspan before him......

this could help the economy more than you think. by devaluing the dollar it will force the yaun's value up. that will have an effect on exports/imports, and thats a good thing. it sucks because everything will cost more. but, overall it could be a plus by put people back to work in the US.

[mawilson 2,133]

Is anyone surprised?

[Obama 2012 1,714]

this could help the economy more than you think. by devaluing the dollar it will force the yaun's value up. that will have an effect on exports/imports, and thats a good thing. it sucks because everything will cost more. but, overall it could be a plus by put people back to work in the US.

Bernanke's job isn't to improve the economy. His job is to make the FEDs investors more money.....

[luckytxn 2,264]

Everyone is going to love it if inflation takes hold in a big way. It will be like living under a Carter administration again.

[Pinocchio Liberal 268]

this could help the economy more than you think. by devaluing the dollar it will force the yaun's value up. that will have an effect on exports/imports, and thats a good thing. it sucks because everything will cost more. but, overall it could be a plus by put people back to work in the US.

How devalued do you want to be? The market went up today and so did GOLD! Hedgin goin on here. Uncertainty SUCKS!

Edited November 5, 2010 by Col. Lingus

[웃 910]

I bomiti uobamad

[Ban Hammer 13,352]

Everyone is going to love it if inflation takes hold in a big way. It will be like living under a Carter administration again.

does that mean disco will be back in?

[SuperDuper! 230]

How devalued do you want to be? The market went up today and so did GOLD! Hedgin goin on here. Uncertainty SUCKS!

No it doesn't. Quit moaning, and start profiting on it......

[Pinocchio Liberal 268]

Going to Turkey is sooo fvcking fitting! Gobble gobble! Is there a such thing as curry poisoning?

[luckytxn 2,264]

does that mean disco will be back in?

If so just shoot me.

Going to Turkey is sooo fvcking fitting! Gobble gobble! Is there a such thing as curry poisoning?

Yes but lets keep him alive. Next in line is Biden.

[lostinblue 1,989]

this could help the economy more than you think. by devaluing the dollar it will force the yaun's value up. that will have an effect on exports/imports, and thats a good thing. it sucks because everything will cost more. but, overall it could be a plus by put people back to work in the US.

exports are a mere 7% of the U.S. economy ($1 trillion, compared to a GDP of $14.14 trillion), it's difficult to see how a modest improvement in exports could offset the dramatic price increases that are occurring across the board in the rest of the economy.（commodities)

See full article from DailyFinance: http://srph.it/aNMUAb

[Mr. Big Dog 10,747]

This is what happens when the central bank does too little. Japan is still fighting deflation which first started in the early 1990's. The lost decade is soon turning into two lost decades. In many ways, America lost a decade already. Time to get going again.

Japan ‘Behind’ in Fighting Deflation as Fed Gears Up

October 28, 2010, 8:23 PM EDT

Oct. 29 (Bloomberg) -- The Bank of Japan’s inflation forecast shows it won’t meet its own guidelines for price stability, a prediction that signals policy makers haven’t pumped enough cash into the economy.

Governor Masaaki Shirakawa and his board yesterday left the size of an asset-purchase fund at 5 trillion yen ($61 billion) even after its introduction failed to stem gains in the yen. At the same time, policy makers predicted consumer prices will rise 0.6 percent in fiscal 2012, little more than half the 1 percent median definition of price stability of board members.

Government reports today reinforced signs of a worsening economy that indicate the Bank of Japan needs to do more, with September consumer prices and industrial production sliding more than forecast. Japan’s inflation-linked bonds signal investors don’t anticipate the nation will end deflation, with prices seen falling an average of about 0.78 percent in the next eight years.

“The BOJ is totally behind the curve,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, who used to work at the central bank. “The BOJ is still hesitant to be proactive considering the size of long- term bond purchases.”

The size of the fund, a portion of which goes to buying government bonds, amounts to 1 percent of gross domestic product, less than the 9 percent injection to base money enacted by Shirakawa’s two predecessors, according to Morgan Stanley. By contrast, the Federal Reserve next week could pledge to pump an amount equivalent to 3.4 percent into its economy.

‘Money Drops’

“Japan will likely need ‘helicopter money drops’ to ensure a full escape from the Great Deflation,” Citigroup Inc. Chief Economist Willem Buiter and analysts including Tokyo-based Kiichi Murashima wrote in a note to clients yesterday. Asset purchases of “100 trillion would be more appropriate,” they said.

The BOJ yesterday also brought forward the date of its next meeting more than a week, to Nov. 4-5, a shift that gives scope to respond to any Fed easing, according to Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former BOJ official.

Japan’s currency, which reached a 15-year high of 80.41 per dollar four days ago, will stay “strong” given the Fed is more likely to embark on “adventurous and extraordinary actions,” according to Nishioka. The yen jumped 0.9 percent yesterday and was little changed at 81.01 as of 8:41 a.m. in Tokyo.

Prices Fall

Government figures today showed that consumer prices excluding fresh food, the Bank of Japan’s preferred measure, slid 1.1 percent in September from a year before. Japan’s inflation-linked bonds, which pay investors more if consumer prices rise, yield more than nominal government securities, indicating investors expect deflation to continue.

The eight-year so-called breakeven rate, or the yield that nominal bonds offer less than that for inflation-linked debt, was minus 0.78 percent as of 9:03 a.m.

Industrial production tumbled 1.9 percent in September from the previous month, a government report showed today, the biggest slide since February 2009.

At the same time, a separate report showed that the unemployment rate fell to 5 percent from 5.1 percent in August, backing the BOJ’s view expressed yesterday that the economy will return to recovery after a temporary slowdown.

Shirakawa told reporters that the Fed’s gathering next week wasn’t behind the date shift. He said the board wanted to speed up the purchases of exchange-traded funds and real- estate investment trusts that are part of the 5 trillion yen program.

Debt Purchases

The BOJ also said yesterday it will buy corporate debt with lower credit ratings than it previously purchased, including BBB rated corporate bonds and a-2 commercial paper. The fund will purchase 1.5 trillion yen of government debt, 450 billion yen in ETFs and 50 billion yen of REITs, the bank said.

The Fed’s Open Market Committee gathers Nov. 2-3. New York Fed President William Dudley, vice chairman of the panel, set expectations for an announcement of about $500 billion in bond purchases with an Oct. 1 speech. Such an amount would be about 3.4 percent of America’s $14.58 trillion GDP.

Anticipation of further Fed easing has undermined the dollar, and helped the yen to a 14 percent jump so far this year. Japan’s deflation enhances the yen’s purchasing power, helping make it a haven.

Japan Example

American central bankers are trying to avoid Japanese- style deflation. Japan’s GDP deflator, a gauge of prices across the economy, has fallen 14 percent since 1997, according to data compiled by Bloomberg.

The Bank of Japan’s board also left unchanged its forecast for the consumer price index excluding fresh food, the measure preferred by the BOJ, to rise 0.1 percent in the fiscal year starting April 2011, and predicted a 0.6 percent gain the following year.

“The BOJ’s latest easing measures are just a reaction to the yen’s appreciation and politicians’ criticism that the bank isn’t serious about beating out deflation,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “The BOJ’s latest monetary easing measures alone aren’t sufficient to beat out Japan’s prolonging deflation.”

Prime Minister Naoto Kan has repeatedly urged the central bank to act to stem deflation in the past year, including a call for an inflation target of as high as 2 percent.

Last Time

Prices responded to the BOJ’s last episode of so-called quantitative easing, according to Robert Feldman, head of economic research at Morgan Stanley in Tokyo. Base money, or notes and coins plus the deposits banks hold at the central bank, surged 58 percent from 2001 to 2003. The headline CPI rose in 2004 for the first time since deflation got entrenched in 1998.

Base money peaked in January 2006, and has since shrunk 14 percent.

Central banks have turned to asset-purchase programs once they’ve reduced their benchmark interest rates -- as in the case of Japan and the U.S. -- to near zero.

Shirakawa has said that the bank needs to maintain its self-imposed limit of keeping its Japanese government bond holdings below the amount of bank notes in circulation to help avoid any image that it’s financing the government’s budget deficits.

Prime Minister Naoto Kan’s Cabinet has approved a 5.1 trillion yen stimulus aimed at helping local governments and small businesses cope with the strengthening currency.

For Japanese companies, around 90 yen is “the limit to stay profitable,” Eiji Hayashida, chairman of the Japan Iron and Steel Federation and president of JFE Steel Corp., said this week. Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said this week the automaker plans to revise its expected exchange rate for the second half of this fiscal year to reflect a stronger yen.

“It’s crucial for the bank to provide long-sustaining money to the economy, and therefore it’s necessary to buy long-term government bonds aggressively,” said Adachi at Deutsche Securities.