The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

. . . and, the Fed said what??

08/10/2010

Today, the Fed left interest rates unchanged, which was no surprise and certainly no big deal.

However, they also said they would stop shrinking their balance sheet, by using the mortgage paydowns they’ve been receiving to buy more Treasury bonds. When that happened, the dollar dropped suddenly. The reason this happened is because the increased demand from the Fed to buy Treasuries caused the price of Treasuries to go up, which causes the yield to go down. When investors earn lower interest on the their money in the U.S., they clearly don’t need as many dollars and sold them, driving down the price or value of the dollar.

Was the Fed action a good thing? While a weaker dollar will help our exports, the real message is that the Fed admitted the economy is slowing down and will do whatever it can to support continued growth.

But, how much more can the Fed actually do? It is like watching a fighter using only one arm. The “Fed-arm” is fighting as hard as it can. Unfortunately, the “Congress-arm” is broken!

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