The Federal Reserve should announce today additional purchases of debt to support the economy, according to Henry Kaufman, the former Salomon Inc. vice chairman nicknamed Dr. Doom for his forecasts.
“There is an important decision that has to be made by the Federal Reserve today,” Kaufman said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “That decision is whether to come in and buy government securities, coupon issues, presumably longer-dated issues, in order to offset the maturing mortgage obligations that are coming due over the extended period of time. The Fed should do that.”
The central bank is lagging behind the private sector in recognizing slower economic growth, said Kaufman, 82, president of Henry Kaufman & Co. in New York and a former board member of Lehman Brothers Holdings Inc. The yield on the 30-year bond will drop almost 0.5 percentage point to 3.5 percent, Kaufman said.
A reinstatement of stimulus would ease pressure on homeowners by influencing “the rate that has to be paid on mortgage securities, and therefore a lower mortgage rate will allow many individuals to continue to refinance their existing mortgages and reduce their mortgage debt service burden,” Kaufman said.
Some investors are speculating that the Federal Open Market Committee may consider providing additional stimulus to the world’s biggest economy after data indicated the recovery may be stalling. The Fed has kept the benchmark interest rate virtually at zero since December 2008 and also bought Treasury, housing- agency and mortgage-backed securities in a stimulus strategy known as quantitative easing.
St. Louis Fed President James Bullard wrote in a research paper released July 29 that the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep rates near zero.