How Will the Fed Tackle Inflation?

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Wary of concerns regarding future inflation, the Federal Reserve is mulling a non-traditional approach to the possible scenario of more asset purchases.

If the central bank needed to buy more bonds to boost economic growth, it could then borrow back the money it spent, taking it out of circulation. The money would be borrowed for short terms — as short as 28 days — on low interest rates, but would effectively be sterilized, according to a report published Wednesday by the Wall Street Journal. The idea would be to reduce bank holdings of long-term securities, which, the report adds, would push down long-term interest rates and encourage spending by households and businesses.

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The idea is to calm fears that the money, if it were to be in circulation, could lead to inflation in the future — a criticism that the Fed has long faced in its efforts to stimulate growth. “The mad scientists at the Fed are contemplating every single possible scenario to keep longer-term interest rates from moving higher,” Peter Boockvar, an equity strategist at New York-based trading firm Miller Tabak, told Reuters.

Michael Feroli, an economist with J.P. Morgan Chase (NYSE:JPM), said that commodities and stock prices would be pushed higher, or the dollar would dip, if there was a perception among investors that inflation was moving higher. Similar measures to spur the economy in November 2010 had largely been perceived to be responsible for rising global commodity prices at the time.

A new growth boost by the Fed remains only a possibility at the moment, but it could be in line because of the recent hike in oil and gasoline prices. Fed officials are set to meet next week, but the WSJ report suggests there have been signs that would be an unlikely time to launch new programs.

Federal Reserve officials declined to comment on the report.

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To contact the reporter on this story: Aabha Rathee at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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