Fed Annoucement Means Bernanke to the Rescue

If you were a White House economic adviser ( like Larry Summers) and perhaps knew that in a few days the Federal Reserve was going to announce an expansion in its balance sheet by over $1.16 trillion with $300 billion in Treasury purchases alongside increases in other purchases of $750 billion in MBS debt and $100 billion in agency debt, you just might tell Americans that the stock market was the "sale of the century." 

Wow, the Fed went all in, my friends. And a bit of surprise since it was less than two weeks ago that the president of the NY Fed said buying treasuries wasn't a good use of the Fed's balance sheet. And of course, the mortgage piece of this is the really big news since it should have the effect of lowering mortgage rates. Ethan Harris of Barclays Capital give his two cents:

These are very large numbers. The total buying program has expended from $600bn to $1.75trn. The Fed is essentially underwriting half of the gross issuance in the MBS market and 30% of the gross issuance in the Treasury market. With the rest of Washington moving in slow motion (and in some cases hindering the revival in capital markets), the Fed continues to move ahead aggressively. We see this as equivalent to a 75bp cut in the funds rate. This underscores our belief that a combination of monetary, credit and fiscal easing will slow the recession in 2Q and spark a modest recovery by year-end.

The key words are "modest recovery." That will not stop unemployment for rising, unfortunately, though this does take Great Depression 2.0 off the table. But how about Stagflation 2.0?