They are already buying back Treasuries and Mortgage-Backed Securities (MBS).
Lest we forget -- the Fed is now the principal buyer of US Treasury bonds dated with maturity dates of more than seven years. They are now buying three-quarters of all the bonds back that the US Treasury issues - and sells.
Also they have upped the amount of Mortgaged Backed Securities they will be buying and are committing in essence another $500 Billion to buy back this mortgage backed paper in an effort to liquefy - or increase liquidity - in mortgages.
So why would anyone believe what Bernanke's saying now? It doesn't matter because the Fed is sending a signal to banks. They don't have the power to force banks to lend money, but what they can do and have done is make it, so the banks are going to have to lend in order to make any kind of spread at all. They are clearly signaling that long rates -- or rates at the long end -- are going lower. They are saying -- if you the bank expect to be able to make any money, you've got to get money out into the system at 4-5% -- while you still can.
Why? Because long rates are moving lower and the capital cost -- the difference between the banks' cost of money and what they can put it out at is going to begin to shrink -- as it has been doing for the last four years.
The Fed is now saying that the rate of that shrinkage will now be more dramatic because the Fed itself is pushing the string on the long end making the long rates lower.
The banks have been making money on repos -- overnight parking of Fed funds as it were -- but now they know that they cannot stay in business on overnight quarter point money, i.e. on the "float." They can't make any real money on floating their balance sheets at quarter point overnight money.
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* Author AL MARTIN is an Independent Political-Economic Analyst and Market Analysis Expert with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. He is also currently trading the commodity futures market every day and night and has a teleconferencing service to facilitate transactions in the markets. This is a service for independent market experienced traders.
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