The emergence of an important Fed insider.

Position:Off The News

WALK THROUGH the hallways of the Federal Reserve these days and it seems only one question is front and center: how to run if need be a "nontraditional" monetary policy. In other words, what if U.S. central bankers find, after lowering the Fed funds rate further and reaching a bottom (perhaps somewhere around 75 basis points), that a further reduction would be too disruptive to the money market fund industry? Would officials contemplate, in lieu of further cuts in the Fed Funds rate, buying Treasury securities of longer maturity as they "move out the yield curve"?

The question remains how to conduct such an operation. Would the Fed first buy the short end of the Treasury market and gradually move to longer maturities? Some have suggested instead that the Fed try to achieve a "neutral" approach to purchasing securities across the yield curve, a tricky feat to say the least. After all, reading markets can be difficult. The FOMC reduced short-term rates 25 basis points at its June meeting instead of the 50 basis points the "smart money" in the markets was expecting, and the long end of the bond market collapsed.

What's interesting is that should the Fed move to a nontraditional approach, a...

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