Senate Republican Leader Has No Opinion ‘At This Point’ on Fed Buying $600 Billion in U.S. Debt

By Matt Cover | November 8, 2010 | 5:15 PM EST

Senate Minority Leader Mitch McConnell (R-Ky.) at the Heritage Foundation. ( Starr)

( – Senate Minority Leader Mitch McConnell (R-Ky.) said he does not have “an opinion at this point” on whether Republicans should try to stop or restrict the Federal Reserve from buying $600 billion in federal government debt.

At the conservative Heritage Foundation on Thursday, asked McConnell whether “Republicans will try to prevent or stop the Treasury from selling Treasury bonds to the Fed rather than putting them [up for sale] on the open market?”

McConnell said, “I haven’t got an opinion on that at this point.”

The Federal Reserve announced on Wednesday that it would buy $600 billion in Treasury bonds by the end of the second quarter of 2011 (in June), a pace of about $75 billion per month.

The move, known as quantitative easing (QE), is designed to keep interest rates as low as possible and provide banks with more reserves that they can then loan to individuals and businesses, ostensibly to stimulate economic growth.

“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities,” the Fed said in a statement, adding that it planned to purchase “longer-term Treasury securities,” which will have “an average duration of between 5 and 6 years.”  (Some of these bonds will mature at 1.5 years and others at 17-30 years.)

By keeping interest rates low, the Fed hopes to jump start the nascent economic recovery by making investment and private sector borrowing as cheap as possible. It is also trying to keep prices down during a time of high unemployment.

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

To buy the Treasury bonds, the Fed holds an auction in which banks and securities brokerages that trade with the government and the Fed submit bids to purchase the bonds. Some of these primary dealers include J. P. Morgan Securities Inc., Citigroup Global Markets Inc., Barclays Capital Inc., and Goldman, Sachs & Co.

The primary dealers then will sell the bonds to the Fed, maybe the next day or at some point in the near-future. The Fed purchases the bonds by crediting the banks’ reserves, which can then be converted to currency on demand.

Rep. Mike Pence (R-Ind.) criticized the Fed's plan saying it could endanger the dollar and damage the economy.

“Today, the Federal Reserve has entered uncharted territory,” Pence said in a statement on Nov. 3.  “Diluting the value of the dollar by continually increasing the supply of money poses an incalculable risk. Instead, Congress needs to embrace pro-growth fiscal policies to stimulate our economy rather than masking our fundamental problems by artificially creating inflation. The American people deserve a government that protects the purchasing power of the dollar.”

Incoming House Budget Chairman Rep. Paul Ryan (R-Wisc.) said that the Fed's move was “a big mistake” that could lead to inflation “down the road.”

“It's a big mistake, in my opinion,” Ryan said on the Nov. 7 edition of Fox News Sunday. “Look, we have Congress doing tax and spend, borrow and spend. Now we have the Federal Reserve doing print and spend. If this quantitative easing, which is basically monetizing your debt--I think the upsides are very low.”

“We already have very loose monetary policy, very, very low interest rates,” said Ryan. “This is going to give us an inflation problem in the future. It's going to give us an interest rate problem in the future. It is destabilizing investment horizons.”