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California’s delay of a $10 billion municipal bond sale has only fueled existing chatter on trading floors that the Federal Reserve would take the extraordinary step of buying these securities just as it has with Treasuries. Chairman Ben Bernanke would pursue this unprecedented route, if he thought necessary, even after the vocal criticism he’s received for his second round of quantitative easing, they said.
“Given the recent bond offering by California appears to have been given the cold shoulder by the public, might they turn to the Fed?” asks Art Cashin, director of NYSE floor operations at UBS Financial Services, in his widely-read morning note to clients.
Cashin has often referred to a 2002 speech by Bernanke on deflation, where the Chairman hints at buying all kinds of securities as a playbook for the current crisis.
“The Fed has the authority to buy foreign government debt, as well as domestic government debt,” said then-Governor Bernanke, to the National Economists Club in Washington D.C.
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