Wednesday, March 18, 2009 0 comments ++[ CLICK TO COMMENT ]++

FedRes starts buying long bonds

The FedRes had been signalling this for months and they finally implemented it. Associated Press is reporting that the FedRes will buy up to $300 billion in long-term government bonds, and an additional $750 billion of mortgage bonds from the GSEs.

The Federal Reserve announced Wednesday it will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt.

At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most -- if not all -- of next year.

Fed purchases should boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt. The last time the Fed set out to influence long-term interest rates was during the 1960s with Operation Twist, conceived by the Kennedy administration.


The Fed also said it will buy more mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to help that battered market. The central bank will buy an additional $750 billion, bringing its total purchases of these securities to $1.25 trillion. It also will boost its purchase of Fannie and Freddie debt.

In addition, the Fed said a $1 trillion program to jump-start consumer and small business lending could be expanded to include other financial assets.

As the article points out, the last time the FedRes purchased long-term government bonds was back in the 60's. If my reading of history is correct, the FedRes also kept buying huge quantities of government debt in the 1940's.

It'll be interesting to see how the market interprets these actions. On the one hand, it'll help the economy. The strategy here is to increase government leverage in order to cushion the blow as the consumer and various financial institutions de-lever. On the other hand, this signals desperate times and shows how bad things really are. The unintended side-effects from all this is uncertain. The battle between inflationists and deflationists rages...


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