"They" take enormous bets all the time with respect to issuance. It's all one big curve-trade. Do you really think it's random (asking, not stating your position)? Not a loss of principal, but a massive opportunity loss.
Why is that a curve trade? The Fed (rather - more precisely, the Treasury) has a certain duration target in mind and also issue to ensure certain amt of regularity and liquidty in benchmark points on the curve, which in turn encourages better market participation. The US is not alone in pursuing these goals - most large sovereigns do the same to provide a liquid market in their securities. Most fundamentally, if the Fed has no PnL target and its governers are not paid to earn PnL - why would it bother doing these massive curve trades?
Well, I have to believe that they have a rate forecast or an elasticity model which is some measure of best-practice. I'll concede this point; as my main contention is that they lose (Px or on opportunity) on virtually every trade. If for no other reason, they have a fiduciary duty not to be careless. Ugh. Kashkari at Treasury calculated the bailout monies needed on the back of an envelope based upon notional CDO exposure and simply applied a decile. Quote, "I pulled it out of my ass". There are so many working parts to the downstream/redox of paper-stimulus that nobody can make an educated guess as the the net PNL or even assume the outcome is remotely beneficial to GDP and/or job creation (pick a metric). The only thing we can put a number on is how much funding is approved by those fucking ghouls in Congress. I am 100% behind Federal infrastructure stimulus, save for the bullet train thing. Whoever came up with that certainly failed geography.
I think it's a valid point, atticus, but I do think that in this case it's a matter of choosing between several unpleasant alternatives. I don't think it's a case of the Fed willfully deciding that QE2 is going to consist of purchases of shorter-dated paper, no matter what the cost and no matter what better alternatives exist. There's all sorts of drawbacks to doing other things, some of which sjfan had alluded to. Moreover, I think the Fed has (so far) done much better than, pretty much, most other CBs (especially Hildebrand at the SNB, who must have thought he was still a PM at Moore when he did all those interventions). As to your broader point about the state of the US economy, I can also agree with some of your points, but, IMHO, it's mainly the politicians that are the culprits, not the Fed.
This is the point you make that I really have a hard time understanding. First, I disagree that the Fed is doing a 'trade'. The Fed is effecting monetary policy. It is not trading for the US Govt Prop Account. Second, if any policy action they take is successful - then rates will necessarily rise - which means any fixed income instrument they hold will be at a loss. There is no way of effecting QE2 through the rates market without realizing a loss if they are ultimately successful. Finally, third - how have they been careless? (other than by definition QE2 purchases will be marked to market losses). If nothing else, their purchasing profiles show that they are quite aware of their duration profile.