Fed Announces Major Steps Following FOMC Meeting
by Tim Manni
Beginning in December we wrote that the conclusion of the Federal Open Market Committee (FOMC) meetings were growing less about changes to the federal funds rates than they were about the announcement that followed the meeting. Today’s conclusion was no different. While the Fed decided to once again leave the target range for the fed funds rates at 0 to .25%, the big news was the Fed’s decision to expand their balance sheet — and expand it extensively they will.
The brief press release issued immediately after the conclusion of the two-day meeting introduced the Fed’s expanded plan to purchase up to $1.25 trillion worth of Fannie and Freddie mortgage backed securities (MBS), $300 billion in longer-term Treasury securities, as well as a plan to increase their purchase of F&F debt by up to $100 billion.
The Fed’s decision to purchase an additional $750 billion worth of F&F MBS comes less than four months after their initial commitment to purchase $500 billion worth of the securities. To date the purchase of agency MBS has been one of the Fed’s most successful programs — guiding conforming rates to historically low levels as well as triggering a national refi boom. The announcement of another grand purchase is expected to do the same.
“This suggests to me that this is an enduring support moving forward, so mortgage rates will remain lower and stable,” said HSH Vice President Keith Gumbinger. With the Fed spending about $100 billion a month on MBS, their original commitment of $500 billion was due to run out some time around May. The latest pledge to spend another $750 billion should allow this program to continue through year’s end.
“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability,” assured the FOMC in their press release.
Perhaps the most surprising portion of today’s announcement was the Fed’s decision to begin purchasing longer-term Treasuries — a strategy that has never yet been employed by the Federal Reserve. The move is designed to drive down rates for things like commercial loans and possibly mortgages.
Stocks reacted well to this afternoon’s news, finishing at their highest levels in nearly a month, according to MarketWatch.com.
