The luck of the Irish for the Fed?

Yes, I know the expression 'luck of the Irish' is supposed to be upbeat. But what was lucky about the potato famine?

The Fed is pondering doing a few of the last things it had 'threatened' it might do to stimulate the economy. It is a good time to wonder if the Fed will follow through. Will it really buy long-dated treasuries in an attempt to drive yields down? Is that a good idea? Will it work?

Academic studies suggest that the Fed will have a hard time imposing any meaningful impact on long term treasury yields by simply purchasing long term treasury paper. Financial assets are simply too good at being substitutes for one another for that to work. When something alters the yield on a bond or a note to the market's dislike the market finds it is easy to shift into something else. That sort of asset ambivalence will make it hard for the Fed to have market impact by buying Treasuries in some preferred habitat.

Second it's not a good idea. If cutting short term rates to zero has not brought longer rates down, there is a reason for that. Going out there and grabbing the yield curve by the neck and stomping on it (so to speak) is not likely to enhance market confidence in the Fed for 'doing the right thing.'

If the Fed has some evidence that there is some market imperfection at work there may be room and grounds to act. But the Fed should be careful. There are any number of market participants that are worried that the Fed's balance sheet expansion ultimately will prove inflationary. That is a factor that could elevate longer treasury yields and it is why the Fed should be careful about fiddling with the curve.

In fiddling with the yield curve the Fed is playing with fire. There is little reason to think that such interventions could be powerfully effective and many more reason to think that the Fed could get itself in trouble with such an operation. Given the importance of long term rates to international investors, I would worry about some impact on US capital flows, too.

On balance if what the 'government' really wants, is to get mortgage rates lower for new borrowers and current mortgage holders, it should just start a subsidy program for them. That is the most efficient thing to do. All this messing around in an already messed up marketplace is unlikely to do much good and could do harm.