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What the Federal Reserve has left in its arsenal

David Brancaccio Mar 12, 2012

David Brancaccio: Who says the Federal Reserve is out of tricks? Ahead of a meeting of our central bankers tomorrow, we shrug off the lethargy of daylight savings time Monday by catching up with Allan Sloan, Fortune Magazine’s senior editor-at-large. Hello Mr. Sloan.

Allan Sloan: Good morning, David.

Brancaccio: So, our central bank, the Federal Reserve, had this thing last fall “Operation Twist” — something about lowering longer-term interest rates. But then all these people were talking about, the Fed is running out of tools to help stimulate the economy. Have they completely run out?

Sloan: Well, every time you think they have they create something else. And the latest trial balloon is something with a wonderful name called “sterilized bond purchases.”

Brancaccio: “Sterilizing” the bond purchases — what is that?

Sloan: One way is maybe they don’t want the bonds to reproduce. But the real meaning of this is that the Fed would buy long-term bonds, which puts money into the world. And then it would take money out of the world by creating short-term securities other people would buy. So at the end of the day, you have the Fed forcing down long-term rates without adding to the money supply.

Brancaccio: So, I mean, it’s really the Fed finding a new way to go shopping for bonds?

Sloan: Right. This way, they get what they want — which is to lower long-term interest rates — without upsetting markets and various worriers about inflation by taking the money that’s created by buying the bonds and taking it back out of the financial markets.

Brancaccio: Now, Mr. Sloan, I got to ask you: is this a good or bad idea?

Sloan: I don’t know if it’s going to work. But what I do know is, whatever you think of the Fed, unlike the rest of the American government, it’s actually trying to do something. It’s trying to force down interest rates; it’s trying to stimulate the economy. And unlike the Republicans and the Democrats, it’s not doing stuff that will never pass in order to make political points. You’ve got to give them points for honesty, and trying.

Brancaccio: Allan Sloan, senior editor-at-large, Fortune magazine. Thanks so much.

Sloan: You’re welcome, David.

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