The Federal Reserve announced Tuesday, August 10, that it would roll over its maturing mortgage bonds into long-term Treasury purchases.
The move is an admission by the Fed that the biggest risk to the U.S. economy is a deflationary spiral; moreover, the government debt purchases are a return to Fed Chairman Ben Bernanke’s stated willingness to throw money from helicopters if necessary.
It is worth recalling how Bernanke very gingerly set up this rather drastic move, in congressional testimony on July 21. At that time, he called the outlook for the economy “unusually uncertain” and expressed a willingness to take further policy action if needed.
Apparently, plunging home sales since expiration of the home-buyer rebate, accelerating job losses in the latest unemployment report, the enormous spike in our trade deficit with China (and the People’s Bank of China pushing down the yuan, signaling an even less favorable climate for U.S. exports going forward) — all this and more data indicating U.S. economic weakness have confirmed Bernanke’s worst fears.