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Fed to boost T-bond purchases by $600 billion in bid to keep rates low

November 3, 2010 | 11:48 am

The Federal Reserve said Wednesday it would boost its Treasury bond purchases by $600 billion through June, making good on its promise to provide more aid to the economy.

The Fed’s new “quantitative easing” program, or QE, is aimed in part at pumping more money into the financial system by way of ramped-up bond purchases from banks and other investors, with the hope that the cash eventually gets into the real economy.

Already holding short-term interest rates near zero, the Fed wants to use QE to keep longer-term interest rates, such as on mortgages, low as well.

The Fed has been telegraphing for the last three months that it would expand its purchases of Treasuries. In recent weeks, Wall Street had expected a QE commitment of from $500 billion to $1 trillion.

Fedhq The Fed’s total bond purchases will be more than the stated $600 billion, because it already has been buying Treasuries using the investment proceeds from mortgage bonds it owns. The latter purchase program began in August. Combining that program with the new commitment, the Fed said it expected to buy a total of $850 billion to $900 billion in Treasuries by June.

Policymakers left the door open to buying even more bonds -- or to scaling back the program, depending on how the economy fares.

In its post-meeting statement Wednesday, the Fed said it would “regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”

This is the second time the Fed has launched a major bond-buying program. Under the previous QE program, launched in late 2008 and completed in March 2010, the central bank bought $1.7 trillion of mortgage-backed bonds and Treasuries.

In the bond market Wednesday, the reaction was mixed. Shorter-term Treasury yields were modestly lower while longer-term yields rose. Treasury yields already have fallen sharply in recent months, anticipating that the Fed would step back into the market.

The 10-year T-note yield, a benchmark for mortgage rates, was at 2.54% just before the Fed’s announcement, down from 2.96% on Aug. 2. The yield rose to 2.61% after the announcement.

The two-year T-note has been holding near a record low of 0.35% in recent days, down from 0.56% on Aug. 2. The two-year yield eased to 0.34% after the announcement.

There is, of course, no shortage of Treasury securities with the govermment running annual budget deficits exceeding $1 trillion. The Fed's purchases will, in effect, help finance the deficit.

Here is the full text of the Fed’s statement:

Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

-- Tom Petruno

Photo: Federal Reserve headquarters in Washington.

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