Wednesday, June 10, 2009

Printing money to inflate the economy has backfired

The Fed continues purchasing agency paper at a healthy pace. Here are the net purchases from May 28 through June 3 via the NY Fed operations. The money printing presses are firing on all cylinders.

The challenge for the Fed is daunting as their programs are starting to backfire. The purchases are not having the desired effect. Today we saw a continuing drop in mortgage applications as mortgage rates spiked.

30-year mortgage national average:

With all the liquidity in the system and dollar weakness, energy prices are moving up as well. This will potentially pressure both the strained, overleveraged consumer as well as the US auto industry who will need all the help they can get in trying to make a comeback.

Retail gasoline price:

And foreign governments (this time Russia) are continuing to get more cautious in allocating their foreign reserves to US Treasury paper - see story. Yields continue to rise, pressuring mortgages. The Fed continues to buy agency paper to bring rates down, injecting more liquidity into the system. It's a vicious circle.

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