The Fed has markedly changed strategies with its announcement earlier this week that it would be committing $300 billion into treasuries and another $750 billion into mortgage backed securities. By doing so, it hopes to bring down longer term interest rates, thereby providing businesses and homeowners with much needed cheaper credit. The strategy seems to be working as long bonds have been rallying ever since the announcement was made. It also risks sparking inflation into the future, however, as the markets also seem to be signaling with the swift drop in the dollar and the sharp rally in both the value of gold and TIPS. The market is also indicating that it is not confident the Fed will succeed in tackling the perceived inflation threat.
The move which is meant to provide additional stimulus into the economy essentially diminishes the independence of the Federal Reserve as it sort of becomes an agent of the Treasury (effectively providing the government with cheaper credit). On the other hand the scale of the current crisis is unprecedented which in a way justifies the use of extreme measures to tackle it.
