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I guess the market is in a frenzy over an article in the WSJ by John Hilsenrath who has officially become the Fed’s journalist. Hilsenrath says the Fed might engage in a new form of bond buying in which they “print new money” (not really), buy new long-term bonds and then borrow it back for short periods at low rates:

“Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.”

This sounds like a shell game to me. Who’s got the money? The Fed gives the banks reserves in exchange for long bonds and then borrows back the money? As if they need to stop banks from lending those reserves (banks don’t lend reserves)!

We all know that QE2 had almost zero economic impact. After all, how could it, since it doesn’t really alter net financial assets and does little to impact interest rates. These sorts of asset swaps might influence investor sentiment, but they don’t seem to have any real substantial impact on the markets. In fact, the one thing that QE2 seems to have potentially achieved was a change in inflation expectations, but this program is aimed at stopping that.

So long story short – I have no idea what this would possibly accomplish, but it seems to have grown men excited about sterilization so “wealth effect on”…..