THE FEDREAL RESERVE ISSUING IT'S OWN BONDS?

Here's an article from NYTIMES.com

Bonds a Bad Bet

The prospect of the Federal Reserve issuing its own bonds now that the United States Treasury has stopped borrowing on its behalf could paradoxically make the world a riskier place. It threatens to reduce the effectiveness of Fed policy moves or, worse, influence them.

The tactic is only at the trial-balloon phase, and Congress may well reject it as an end run around its right to determine government borrowing. But lawmakers have blessed questionable strategies before.

If the Fed did issue traded debt, the market prices would act as a barometer of how investors viewed its policies. Even if the debt were explicitly backed by the government, prices would probably still reflect market sentiment. After all, bank-issued bonds insured by the Federal Deposit Insurance Corporation and the quasi-guaranteed debt of Fannie Mae and Freddie Mac trade with effective interest yields that exceed Treasury securities by notable, and in some cases volatile, margins.

It’s likely that rates on any Fed-issued bonds would diverge from Treasury bonds too, especially since the central bank lacks the power to raise tax revenue to pay interest. The market would probably look to the Fed’s own balance sheet, which has more than doubled in the last year, and weigh that against its ability to raise money by increasing reserves, when determining the risk of the bonds.

If the Fed pursues policies that could result in a loss — like its plan to lend to entities that buy packages of consumer loans — the risk premiums on its bonds should increase.

Such snap judgments on policy moves could undermine the Fed’s effectiveness. If the bond market gave a thumbs-down to even a sensible policy, it would throw doubt on the Fed’s willingness to follow through, especially because the higher risk premium would increase the Fed’s future borrowing costs. Since monetary policy has a large psychological element, that could be a big problem.

Of course, there are already indicators of market sentiment about Fed policy. And the devil of any Fed debt would be in its details. But with the Fed’s resources stretched and its mandate expanding, giving the markets another red flag to wave seems foolhardy.