FOMC Will Slow Purchase of Treasuriesby Tim Manni
The release following the conclusion the Fed’s Federal Open Market Committee (FOMC) meeting today revealed the Fed’s plans to begin winding down one of their many facilities (emphasis added):
…the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.
As market observers eagerly await the announcement of the Fed’s exit strategy, we propose this consideration: come October, let alone the end of the year when MBS purchases are due to expire, will the Fed’s absence in the marketplace cause a significant jump in rates? Between now and October, will there be enough private demand to buy up all of the supply that’s currently being absorbed by the Fed? If the private demand isn’t quite there as these programs are slated to expire, don’t be surprised if the Fed extends their purchase periods.
The U.S. central bank has purchased more than $250 billion of the $300 billion in Treasurys it promised in March to buy in an effort to keep borrowing costs, particularly for companies and homebuyers, affordable.
The Fed has bought $712 billion of the $1.25 trillion in mortgage-backed securities it intended to purchase, and another $109 billion of the $200 billion in housing-agency debt it proposed buying, according to Credit Suisse…
On a separate but related note, as was widely expected, the FOMC decided to keep the target for the Federal funds rate at 0 to 0.25%. “The Committee…continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” stated the release.
We’ll have to wait a few weeks to get a more-detailed glimpse into the inter workings and conversations of this meeting.