Monday, June 27, 2011

Fed to Buy $300B in Treasuries To Keep Interest Rates Low, While BIS Says Rates Should Rise To Control Inflation

The headlines are all over the palce today, giving very conflicting "news".

The Bank for International Settlements, BIS,  said that central banks need to start raising interest rates to control inflation and may have to act faster. From its annual report: “Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” “Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”
“Global inflation pressures are rising rapidly as commodity prices soar and as the global recovery runs into capacity constraints,” “These increased upside risks to inflation call for higher policy rates.”


Jaime Caruana, the BIS General Manager said global headline inflation has risen 1% to 3.6% since April 2010. At the same time, short-term interest rates adjusted for inflation “have actually fallen in the past year, from minus 0.6 percent to minus 1.3 percent globally,”
“The world economy is growing at a historically respectable rate of around 4 percent,” “The resurgence of demand has put concerns about deflation behind us. Accordingly, the need for continued extraordinary monetary accommodation has faded.”

However, today Reuters reports that the Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of QE2, as the central bank "uses its $2.86 trillion balance sheet to keep interest rates low".

The Fed said last week that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. "That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system".

Nothing here is really new. Rates cannot rise as the world recovery is extremely fragile, while food and energy inflation are having a an effect on people's purchasing power. This is also why we see strategic oil reserves being released.

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