U.S. News: Fed's Gamble: Buying Long Bonds
The Federal Reserve's controversial decision to buy long-term Treasury securities is a step Chairman Ben Bernanke has been contemplating for much of this decade in thinking about how to prevent a return of deflation and depression.</br></br>He hopes Wednesday's move will push down long-term borrowing rates benchmarked to Treasury bonds, from car loans to mortgage debt to corporate bonds. But it could backfire and fuel fears that the Fed, by using its power to print money to help the government finance soaring budget deficits, is kindling inflation. Those fears could, paradoxically, send Treasury yields higher.</br></br>The market's initial reaction was mostly positive. Treasury yields dropped sharply, as previous research conducted by Mr. Bernanke suggested would happen. The Bank of England's decision earlier this month to begin purchasing government debt provided comfort that the move would work. Yields on British gilts have declined by roughly half a percentage point after it decided to buy gilts.</br></br>An explosion of federal borrowing had started to put upward pressure on Treasury yields, said Brian Sack, an economist at Macroeconomic Advisers LLC. "Fed purchases could relieve some of that pressure and have a meaningful impact on yields."</br></br>But in a hint of potential worries among investors about the Fed flooding the economy with even more money, the dollar dropped against the euro and the yen. The euro landed at $1.34 in late trading, up from $1.30 the day before, the biggest one-day gain since its birth in 1999.