This explains why the dollar dropped so much yesterday.
(Reuters) - The Federal Reserve is discussing re-entering the mortgage-backed securities market later this year if its buying power is needed to hold down interest rates, Market News said on Tuesday in a story citing Fed officials.
The $5 trillion agency mortgage-backed securities market may weaken when last year's biggest buyer, the Federal Reserve, ends its $1.25 trillion agency MBS purchasing program at the end of the first quarter of 2010.
Fed officials, however, "are prepared to contemplate changes if need be, depending on conditions in the economy, housing finance and in financial markets more broadly," Market News said in a story written by Steven Beckner.
"Among the options that has been discussed, say people in a position to know, is doing additional MBS purchases."
The significance of this development is many-layered.
1) It means the private ABS market is still broken.
2) It means that the Fed's plan for soaking up the excess liquidity in the market is on hold for this year.
3) It means that interest rate hikes are also on hold for this year.
4) It means that the dollar is going to fall some more.
At some point the people in charge are going to have to realize that monetary and fiscal stimulus are not solutions for chronic problems in the economy. In fact, they only make them worse.