Federal Reserve To Bolster Lending Power
If there’s really a huge excess of supply, it would restrain demand
The Federal Reserve is considering contingency plans to bolster its lending power, in case measures it has taken to rescue the troubled credit markets fail. One option being considered is to have the Treasury borrow more money than it needs to fund the government and keep the proceeds on deposit at the Federal Reserve.
Other options include issuing debt under the Federal Reserve’s name instead of the Treasury’s, and asking Congress for immediate authority for the Fed to pay interest on commercial bank reserves rather than waiting until a law enacted earlier allows it to in 2011.
If the Fed were to issue debt, it would be following the Bank of England and this could involve issuing short-dated paper in the two-to-five-year Treasuries area. Secondly, the market would not like the Fed to issue long paper which would hang for many years. Should the Treasury decide with Congressional approval to issue more bonds to fund the Fed, there should be good demand for extra paper due to the backdrop of weakening global economic growth, although this would depend on the ultimate size of the issuance.
