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L. Summers Thinks Massive Bond-Buying is ‘Bizarre’

Bond-Buying
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EDITOR NOTE: Yet another economist is sounding the alarm bells about the “bizarre” short-term quantitative easing and bond-buying the Fed is focused on. Former U.S. Treasury Secretary Lawrence Summers explained that “the government now has a floating rate short-term liability outstanding rather than a long-term fixed interest rate liability. At a moment of super uncertainty, at a moment when many people think rates are remarkably low, a decision to fund more short seems bizarre.” Summers, of course, makes a great point that illustrates how much the Fed is catering to big banks and financial institutions. The Fed is using all these short-term plays to keep the markets artificially propped up and the free money train flowing as long as possible. However, Summers, other financial experts, and smart market watchers all know this can only last so long before the bubble bursts. 

(Bloomberg) -- Former U.S. Treasury Secretary Lawrence Summers said the Federal Reserve’s massive bond-buying program is resulting in a “bizarre” situation in which the government’s funding structure is overly focused on the short-term.

Under its quantitative easing program, the Fed purchases longer-term Treasuries and the money it creates to buy them ends up in the accounts that banks hold with the central bank, in the form of overnight reserves.

These reserves earn a rate of interest that’s linked to changeable overnight benchmarks -- currently 0.15% per year. That, in effect is the rate the government, through the Fed, is paying to borrow this money.

At the same time, any payments the government makes on Treasury bonds to the Fed is ultimately a flow from one part of the government to another and, arguably, cancels itself out in the end. So the upshot is the government owes, in real terms, less longer-term fixed-rate debt and more shorter-term floating-rate debt.

“In effect, the government now has a floating rate short-term liability outstanding rather than a long-term fixed interest rate liability,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “At a moment of super uncertainty, at a moment when many people think rates are remarkably low, a decision to fund more short seems bizarre.”

The rate on 30-year Treasury bonds, for example, is currently below 2% and close to all-time lows. And while that is much higher than the overnight rate -- which is close to zero -- the latter is unlikely to stay as low as it is for the next three decades, making it attractive for a borrower to lock in low and predictable costs for the long run.

By buying assets, the Fed has bloated its balance sheet to $8.25 trillion, about double where it was before the coronavirus pandemic tipped the U.S. economy into recession. That’s helped suppress borrowing costs, raising concerns among some economists about the potential for surging inflation and asset bubbles.

Fed officials are now weighing when and how they might start dialing back their asset-purchase program, which currently hovers around $120 billion of Treasuries and mortgage bonds each month, and ultimately lift its overnight benchmark rate.The focus on the short term is “just one of the reasons why I think as quickly as we prudently can without destabilizing things we should be bringing QE to an end,” said Summers, a paid contributor to Bloomberg and professor at Harvard University.

Original post from Yahoo! Finance

All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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