Market waits for signal from Bernanke

He buys, he buys or not? Already announced months before U.S. Federal Reserve Chairman Ben Bernanke, also on the acquisition of U.S. government bonds it. Wednesday is the day of truth.
The Japanese are doing it already and the British also: The purchase of government bonds owned by a world of low interest rates and a dramatic economic recession now in its monetary policy instruments. Experts hope that the U.S. central bank Federal Reserve (Fed) and its Chairman Ben Bernanke on the interest rate meeting on Wednesday for information on their plans to be.

The expectations are high: “It now needs a massive balance sheet expansion, so the situation on the markets relaxed,” said Andrew Tilton, an economist at Goldman Sachs and a former employee of the U.S. Treasury Department. “There must be more coming from the Fed.”

For the banks is the time of the “Quantitative easing” (QE) arrived. This means that the securities they purchase in their arsenal in order to boost the economy. The reason: Because the rates are so low – in the U.S. it is at 0 to 0.25 percent, the central banks have no scope for more rate cuts. Pioneering QE during the current credit crisis, in addition to the Fed, the Bank of Japan (BoJ), the Bank of England and Swiss National Bank.

The BoJ is to work very aggressively. On Wednesday they announced that the purchase of government bonds from 1400 to 1800 billion yen (14 billion euros) a month to expand. In addition, they, the banks in the form of subordinated loans to capital.

Total assets of the Fed is shrinking

The U.S. central bank has already become active. It presented numerous programs to purchase securities and agreed currency swap transactions with other banks. In support of the market for short-term bonds (commercial paper). Youngest thrust is the “Term Asset-Backed Securities Loan Facility (Talf). This is a purchasing program with a volume of $ 200 billion for securities with auto loans, credit card debt and student loans are collateralized.

Through these initiatives, expanded the balance sheet of the Fed clearly. For several weeks, but it is declining at present amounts to 1900 billion $. At weddings, it was $ 2300 billion. “The present meeting is the opportunity to announce the next expansion,” said Michael Feroli, analyst at JP Morgan Chase.

The Fed is the spot. The United States since December 2007 in the recession. In the third quarter, GDP shrank for the year projected at 0.5 percent in the fourth quarter, even in the minus 6.2 percent. The unemployment rate is 8.1 percent. This is the highest level for 25 years. Since the beginning of the recession were now 4.4 million jobs lost – and rising.

The government of President Barack Obama with a lift economic program, help for homeowners and a new bank rescue plan against the economic downturn. But the support burden on the budget actions: Overall planning of the new U.S. President for the current year, with record spending of nearly 4000 billion $. In addition to the initiatives already adopted the draft budget provides for Obama again a buffer of $ 250 billion for bank rescues possible before. The budget deficit is rising at 1750 billion dollars. This corresponds to approximately twelve percent of GDP.

Back to the past?

The record is in debt to the creditors concerned about the creditworthiness of the United States rise. Chinese Prime Minister Wen Jiabao said at the weekend worried. At the same time, data of the Ministry of Finance indicate that foreign investors are buying U.S. assets to hold back.

Should the buyer strike, which would for the U.S. higher interest rates mean. Currently, the yield on ten-year government bond at 2.97 percent. If they climb to 3.25 percent, make it likely that the Fed intervenes, says Richard Berner, chief U.S. economist at Morgan Stanley.

The purchase of government bonds would be for the U.S. central bank a historic step and a reversion to the 40-years. Before the Federal Reserve-Treasury Accord of 1951, the Fed fixed the yields on ten-year Treasury bonds for nearly a decade to 2.5 percent. Even for government securities with a maturity of one year, they established a fixed yield level of 0875 to 1.25 percent for Treasury bills with a maturity of 90 days it was at 0375 per cent.

The central bank was reached without a large stock of paper to keep. 1945, for example, the Fed held only seven percent of the outstanding bonds, 1951, there were 9.2 percent. For comparison: At the turn of the millennium, the rate was just under ten percent.

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