Fed may buy Treasury notes and bonds, and/or agency bonds, in an effort to push interest rates even lower and “spur aggregate demand.”
“Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve’s quiver — the provision of liquidity — remains effective,” Bernanke said in a speech Monday in Texas. “The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand.”
Fed deploying unconventional tools
Bernanke’s comments are the Fed’s latest hint that the world’s most powerful central bank will deploy a ‘new tool box’ and unconventional techniques that Bernanke has previously said most likely would be needed to help the nation cope with its most serious financial crisis since the Great Depression.
Moreover, although the potential actions announced Monday technically are not quantitative easing, they will have that effect, says economist David H. Wang. Quantitative easing involves increasing the reserves in the banking system after the Fed loses the ability to lower the cost of money from an interest rate standpoint.
