Isam Laroui highlights a great speech by Bernanke back in 2002; as Isam points out, one could easily forecast Big Ben's actions since mid 2007 from reading this speech as Big Ben has been kind enough to follow the very playbook he laid out back then. Setting fed funds rate to zero? Check. Cheap money to the banks? Check. Lowering long rates? Check (well, partially - we still haven't seen an artificial cap on rates or a formalized promise to keep overnight rates at 0).
The real doozy though from reading Big Ben's speech is his introduction of the possibility of buying foreign debt in addition to Treasuries. Well, now we're getting serious. This is an option that you hear very little about but has the potential to completely crush what's left of the dollar. A quick look at forward rates tells me that this isn't being fully priced into the market. Much like last week's FOMC movements, once again we're seeing the markets underestimate Big Ben's will to fight our way out - aggregate demand will be filled by the Fed whether we like it or not, and you better get in front of that market movement if you don't want to get squashed.
To clarify - is it likely the Fed will turn to buying foreign debt? As an event, probably not - it's basically a battle cry for a fight to the bottom and there would be other political issues tied up in there. However, with the potential impact of such a move, it's an expected value event to keep an eye out for.
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