With the federal funds rate down close to zero, the Fed announced Wednesday that it will purchase $300 billion in Treasuries securities in the open market over the next six months. Shortly after the central bank wrapped up its two-day policy meeting, the New York Fed released the following details on its website:
The Federal Open Market Committee [FOMC] has announced that the Open Market Trading Desk (the Desk) will begin a Treasury purchase program of up to $300 billion to help improve conditions in private credit markets. The Desk will concentrate purchases in the 2- to 10-year sector of the nominal Treasury curve, although purchases will occur across the nominal Treasury and TIPS yield curves. Consistent with prior outright Treasury purchases, these purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions via the Desk’s FedTrade system. On average, the Desk will purchase Treasury securities two to three times per week. Further details will be provided early next week after consultation with the primary dealers and other market participants. The Desk plans to hold the first purchase operation late next week.
The Fed’s move to expand its balance sheet is another effort from the central bank to stop the economy from continuing contracting, improve credit conditions and block the squeezing on bank balance sheets from further intensifying. However, a constant Fed balance sheet expansion raises some questions about its manageability. Let’s keep in mind, the central bank has already made commitments to the high-priority Term Asset-Backed Securities Loan Facility (TALF – one of the Fed’s vehicles for revving up consumer lending) and Mortgage Backed Securities [MBS] programs. In addition, the Fed today also announced that it will purchase an additional $750 billion in agency mortgage backed securities, bringing its total purchases for the year to $1.25 trillion. A large balance sheet with large purchases my prove difficult to manage, though not impossible, from an unwinding perspective when the “exit strategy” will inevitably be put into effect.
The FOMC also said gross issuance of coupons is expected to be around $1 trillion higher in FY2009 than the previous fiscal year, and the Fed will therefore be absorbing a significant share of the new supply.
By committing itself to pump more than $1 trillion into securities purchases the fed aims at increasing private lending, revive housing and spur the economy to future growth.
Mortgage refinancing activity should be quite strong into the coming weeks.