Monetary policy has become a hot topic in today’s turbulent economy and concerned investors are watching the Federal Reserve Board (“The Fed”) to see what actions they plan to take to help stimulate spending. With much attention given to Quantitative Easing (parts 1 and 2), there has been some question as to what else The Fed could do besides simply initiating QE3.
Reading some accounts, it would seem as though the toolbag of The Fed is empty. Because Quantitative Easing is considered a fairly drastic measure, many assume there are no further actions The Fed can take besides more of the same. Since QE has not solved the problem to the degree that The Fed had hoped, we wanted to find out what other tools are available to The Fed and we came across a great blog post by Dr. Mark Dotzour from Texas A&M that explains it in a very easy to read list.
Here are the ten weapons listed by Dr. Dotzour:
Weapon One: After you have dropped the interest rate to 0 percent, then signal to the market that you will keep the rate low for an extended period of time.
Weapon Two: The Fed could announce specific interest rate ceilings on short-term treasuries up to two years maturity.
Weapon Three: The Fed could attempt to cap yields of treasuries with still longer maturities, say three to six years.
Weapon Four: The Fed could buy mortgage-backed securities issued by Ginnie Mae.
Weapon Five: The Fed could effectively cap the yield on long-term treasuries.
Weapon Six: The Fed might consider purchasing corporate bonds from private companies.
Weapon Seven: The Fed has the authority to buy foreign government debt as well as U.S. Treasury debt.
Weapon Eight: Bernanke notes how strong the stock market rebounded in 1934 after Roosevelt devalued the U.S. dollar by 40 percent in the 1933–34 period.
Weapon Nine: Bernanke suggests that a broad-based tax cut accommodated by Fed purchases of U.S. Treasury bonds to keep interest rates from increasing would be another effective way to increase prices and avoid deflation.
Weapon Ten: The government could increase spending on goods and services or even acquire real or financial assets. “The whole operation would be the economic equivalent of direct open-market operations in private assets.”
For more explanation and a look at which of these weapons have been deployed and to what affect, please see Dr. Dotzour’s original post by clicking here.