"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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Wednesday, December 8, 2010

It's POMO Day!

POMO: Permanent Open Market Operations.

Which means what? Well, an open market operation is one of the means by which a central bank controls short term interest rates and/or the base money supply in the economy. If the central bank is buying a financial asset then it's trying to pump more base money (typically newly printed cash) into the economy, which should in turn reduce interest rates (as there's such an embarrassing wealth of wealth that there's no real point in charging much of anything to loan it out). If the central bank is selling a financial asset, then it's trying to suck base money out of the economy, which should then increase interest rates.

Today? Today, the Fed is buying TIPS. Look for TIPS prices to rise and TIPS yields to fall. In theory, at least.
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