Brazil raises interest rates, Fed's bond buying questioned

Brazil's central bank raised interest rates on Wednesday. Bloomberg reports:

Brazil’s central bank raised its benchmark overnight rate by a half-point for a second straight meeting to cool inflation that is approaching the upper limit of the government’s target range.

The bank’s policy committee, led by President Alexandre Tombini, today voted unanimously, without a bias, to raise the Selic rate 50 basis points, or 0.5 percentage point, to 11.75 percent, matching the estimates of 44 of 51 analysts surveyed by Bloomberg. Six economists forecast a 0.75-point increase and one predicted a full percentage-point increase.

In contrast, Fed chairman Ben Bernanke has not even ruled out more bond buying. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke didn’t rule out expanding the central bank’s asset purchases aimed at stimulating the economy, saying he doesn’t want to see the U.S. relapse into a recession.

Asked at a House Financial Services Committee hearing today what conditions would warrant a third round of so-called quantitative easing, Bernanke said that “what we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out.”

This is despite the Fed's own Beige Book survey finding that businesses are gaining pricing power. From MarketWatch:

Some manufacturers and retailers are finding that they can raise their prices, which is one key pre-condition for inflation to take hold, according to the Federal Reserve’s latest Beige Book survey of economic conditions released Wednesday...

Overall, the economy was improving at a “modest to moderate” pace, the Beige Book report concluded.

Most districts reported that conditions in their regions were improving. Only the Chicago region reported that the pace of growth was not quite as strong as late last year.

Labor markets were seen as improving modestly. Three districts reported that temporary jobs were being converted into permanent hires.

In addition, ADP's employment report showed good job gains in February. Again from MarketWatch:

U.S. private-sector employment jumped in February, and the recent pace of gains has been speeding up, according to Automatic Data Processing Inc.’s employment report released Wednesday.

Private-sector employment rose 217,000 in February, increasing 104,000 at medium businesses, 100,000 at small businesses and 13,000 at large businesses.

But maybe the Fed does need to keep buying bonds. From William Gross in PIMCO's March Investment Outlook:

What an unbiased observer must admit is that most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?