During World War II, the central bank agreed to purchase unlimited amounts of government obligations from banks to keep interest rates low to finance the war, according to the Federal Reserve Bank of Atlanta. [1]

Frankly, this enemy-free struggle is getting downright weird. But it’s certainly having an impact on the markets for US obligations. Wednesday’s monumental campaign to right credit markets [2] had the look and feel of America’s financial foundations creaking and groaning alarmingly. And if that’s not enough to spoil your lunch, Brad Setser with his long string of informative charts and a longer queue of knowledgeable comments built a veritable wall of worry thinking about the waning foreign demand for long dated treasuries.[3] Since the big Fed announcement Wednesday afternoon the US dollar has been getting hammered.[4] However, the Fed move came after business hours in East Asia, so perhaps the impact on the numbers here will be limited. Stay tuned until next week to find out how the foreign central banks took Ben’s new steroid-powered helicopter

UPDATE: I hadn’t noticed that Bill the Butcher was already weighing in Wednesday.[9]  This doesn’t look good.

NEW YORK (Dow Jones)–The Federal Reserve’s decision Wednesday to buy longer-maturity Treasurys and its aggressive buying of mortgage debt are dangerous steps and could cause policy makers much grief down the road, said former St. Louis Federal Reserve President William Poole.

…………..

And here’s Ben’s reply [10] (details to follow ;) )

"We are very much aware that we don’t want to be in the credit markets forever. We need to help them now, but we want to have an exit strategy, and allow those markets to recover and become again fully private sector," Bernanke said in response to an audience question after delivering a speech.

This week’s Reuters report [5] basically reversed most of last week’s biggish selloff. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[6] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[7]

Cenbanks bought back $8.856 billion, or the majority, of the $11+ billion of Treasury Debt they dumped last week. Meanwhile, a minor $0.990 billion Agency Debt buy puts the cenbanks’ holdings of senior GSE debt a mere $217 million above the figure from 3 weeks ago, and less than $2 billion away from the last number of 2008. Agencies holdings have been eerily flat lately.

Which is to say, we’re pretty well treading water. Where is this going? Correct me if I’m wrong, Doomers, but isn’t this story on the Fed move [8] suggesting that Bernanke has gone barking mad, but that because all the other central bankers will inevitably follow his example and corrupt the basis of their currencies too, the net effect will be to frighten everyone into fleeing to the safe haven of … the US dollar? Where is Douglas Adams when we need him??

The treasuries line in twist’s raw numbers graph rebounds up a bit, while the agencies continue to flat-line just above the $810 billion mark.

Setser’s 52-week difference graph is still wandering around figuring where to go next.

Twist’s ratios graphs continue to rebound at a leasurely pace.

 

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Notes and References

[1]: "Treasuries Surge as Fed Expands Purchases to Include U.S. Debt", by Susanne Walker and Dakin Campbell, Bloomberg, March 18, 2009.

[2]: "CREDIT MARKETS: Fed’s Bold Move Injects Bout Of Optimism", by Prabha Natarajan, Wall Street Journal, March 18, 2009.

"It takes your breath away," said Chris Ahrens, rates strategist at UBS. Like most market participants, Ahrens had expected the Fed to keep all options open, but not actually announce Treasury purchases. These purchases are "a significant statement to the market that they’re committed to providing as much liquidity to the market as is needed to get things moving again," he said.

But the dollar was hammered by the Fed’s aggressive moves, which are seen as highly inflationary and market distorting.

[3]: "A bit more to worry about; foreign demand for long-term Treasuries has faded", by Brad Setser, Council on Foreign Relations blog, March 18, 2009.

[4]: "FOREX-Dollar plunges in fallout from Fed Treasury plans", by Steven C. Johnson, Reuters, March 19, 2009.

The dollar fell for a second straight session on Thursday and the euro soared above $1.37, as investors feared the Federal Reserve’s Treasury bond purchases would end up debasing the world’s reserve currency.

[5]: "Foreign central banks’ US debt holdings up-NY Fed", by Burton Frierson, Reuters, March 19, 2009.

[6]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.

[7]: The updated data set as a Comma Separated Value (CSV) file is here.

[8]: "Too early to write off dollar despite Fed’s move", by Wanfeng Zhou and Gertrude Chavez-Dreyfuss, Reuters, March 19, 2009.

While the dollar’s decline may have further to run in the near term, more deterioration in economies around the world will benefit the greenback, given its safe-haven status, analysts said.

"We do not think this is the beginning of a new trend for the dollar," said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon in New York. "We expect the (global economic) outlook to renew its deterioration later this year, which should prompt a flight back into U.S. dollars."
…

"The simple fact is no other currency can come close to matching it. And of course, no other country really wants a strong currency right now."

[9]: "Ex-Fed Poole: Fed Mtge Buying Could Cause Problems", by Deborah Lynn Blumberg, Wall Street Journal, March 18, 2009.

[10]: "Bernanke says Fed has exit strategy from credit policy", by Alister Bull, Reuters, March 20, 2009.