Newmont ultimatum gives Yandal''s bullion bankers a tight deadline

Can quot;helicopter moneyquot; be far behind?

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WASHINGTON, May 29 (Reuters) -- Buying longer-term government
debt could prove to be the Federal Reserve's best
anti-deflation tool if it ran out of room to cut interest
rates, but such a strategy is not without problems,
researchers at the Dallas Federal Reserve Bank said.

In a paper posted on the regional Fed bank's Web site this
week, economists Evan Koenig and Jim Dolmas said the issue is
ripe for consideration because the Fed has little room to
maneuver on short-term interest rates and the economy may need
more stimulus.

quot;Since August ... the incipient (economic) recovery hasn't
unfolded according to plan,quot; the researchers said in the
paper, which was based on a presentation they had made to the
regional Fed bank's Board of Directors.

quot;We're hopeful that positive trends will re-emerge now that
the Iraq situation has been more or less resolved. But if
we're wrong, or if another adverse shock hits the world
economy, then new stimulus will be required.quot;

The authors said that if the benchmark overnight rate were to
drop much further from its current low of 1.25 percent,
popular money market mutual funds could find it difficult to
cover their costs -- an issue Fed chief Alan Greenspan touched
on in congressional testimony last week.

Because of the market stress a low overnight rate might cause,
many economists on Wall Street think the Fed could turn to
so-called unconventional policy tools once the rate reached
0.75 percentage point if further stimulus were needed.

Dallas Fed Research Director Harvey Rosenblum has said
Fed policymakers would discuss quot;unconventionalquot; tools at
their next meeting on June 24-25.

The authors outline a number of tactics the Fed could use,
but hone in on the idea of buying longer-term government debt.

quot;In the event it must act alone, the Fed's best policy option
is probably open-market purchases of longer-term government
bonds,quot; they said. The Fed currently conducts open market
operations in short-term securities only.

They warn, however, that calibrating such operations could
prove difficult.

quot;No one, we believe, has a good quantitative sense of the
mechanics of this strategy -- that is, what size operations
are needed to secure a given stimulus?quot; Koenig and Dolmas
said.

quot;If standard policy options are exhausted, the Fed's quiver
is by no means empty. But the arrows that remain are less
familiar and, perhaps, not quite as straight as the ones that
have already been fired.quot;

One of the other measures they said the Fed could pursue
would be to substantially weaken the dollar.

But they cautioned that a policy of foreign exchange
intervention would, in effect, be conducting a monetary
contraction in the economies of U.S. trading partners.

quot;If the foreign central bank was attempting to pursue a
neutral or expansionary policy, the Fed's action might
generate some consternation or even a policy response,quot;
they warned.

The researchers also said it would be possible for the Fed
to essentially underwrite a large expansion of fiscal policy
by purchasing any fresh government debt.

They further said the idea of instituting a quot;carry taxquot; on
money merited further study as a possible way to eliminate
the so-called zero-bound problem that comes with interest
rates.

quot;This is particularly the case if achieving and maintaining
price stability makes bumping up against the zero interest
rate bound a more frequent event,quot; they said.

Since interest rates cannot drop below zero, a central bank
faces a limit in the degree to which it can rely on lowering
rates to spur growth.

A carry tax would lower the value of currency the longer it
is held without making a transaction, offering a means to
put in place what would effectively be a negative interest
rate.