The Wall Street Journal’s Jon Hilsenrath has again done his job and floated a trial balloon for the Fed to test market reactions regarding “sterilized” overt currency printing. We believe, as previously discussed, that Overt Currency Printing – Round 3 will be here shortly in one form or another.
Sterilized is the same word that was used to describe the current program known as Operation Twist (which we wrote about here). Sterilizing will entail the Fed buying virtually all U.S.-issued long-dated bonds (adding to the 91% of 20-30-year U.S. issuance they already own; see below) with newly printed currency, and then selling short-dated securities. This leaves the balance sheet numerically equivalent to its current level, but expanded when considering the very real changes in the time preference of money.
