" last man standing & fiscal rotation ....."

The US Federal Reserve has left the federal funds target between zero and 0.25 per cent but it has elected to further support a slowing economy. The Fed will reinvest "principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature." The Fed voted 9-1 in favour of the decision with Thomas Hoenig opposing the decision to keep the federal funds low "for an extended period."

For some time now Hoenig has been the sole dissenter in lowering rates and providing further stimulus, and at a vote of 9:1 yesterday I wonder if Hoenig has begun to lock himself into a situation where he feels it is too late to reverse his stance without losing "face"
The interesting thing about the Fed's proposed stimulus round #2 is that it is not creating new money which leads to inflation but rather is recycling the Treasury instruments which are also a key lever for the Government to manage Fiscal & Monetary policy.

The other thought that occurs to me is that what we all want is a more active economy and indeed an activity level that further stimulates other sectors to become self sustaining. Too this end I seem to remember from my Macro Economics lectures that the formula around the money supply and economic activity is MV=PT which essentially means that taking the same money and reinvesting it has the effect of speeding up the economic activity a little faster each time the money supply is rotated through the economy.

Now given that the Fed is rotating the money via reinvestment of the maturing Treasuries etc this seems a reasonable plan to me and I am at a loss as to why Hoenig may have objected. In addition the funding is also targeted into the weakest sectors of the economy and not a blanket reinvestment.

Cheers