Fed Attacks Recession With Shock And Awe
With growing outrage over AIG bonuses casting doubt on Congressional support for further government spending to stimulate the economy, and with no room left to lower short-term interest rates that are already at zero and the recent success of the Bank of England's long-term bond repurchase program, the Federal Reserve Bank launched a shock and awe attack on the recession today by announcing plans to buy up to $300 billion of long-term U.S. Treasury securities in the next few months and to increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac from $500 billion to $1.25 trillion.
It’s the largest effort ever to use monetary policy to influence the world’s largest economy.
Today’s Federal Open Market Committee’s press release had been expected to be a benign announcement about maintaining a zero Fed Funds rate. But instead the Fed dropped the monetary policy bombshell and caused a surge in prices for long-term bonds.
The dramatic Fed announcement is a direct effort to drive down mortgage rates and reawaken the housing market, while also promoting lending to corporate borrowers and consumers.
It precipitated the largest one-day drop in Treasury yields since the 1987 market crash, with the yield on 10-year Treasury notes plunging to 2.53% from above 3% just a day before. The rate on a 30-year fixed-rate mortgage for credit-worthy borrowers fell to about 4.75%.
The risk of the Fed action is that it could weaken in the dollar at a time when America needs foreigners to invest in Government bonds to finance the stimulus packages. The dollar today declined by 3% against euro and gold surged 6.6%. The dynamics are explained in the video by FT columnist John Authers.
This entry was posted on Wednesday, March 18th, 2009 at 9:03 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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Andrew Gluck
March 29th, 2009 at 3:04 pm
The way the Fed have responded to the economic crisis has been unprecedented but also comforting. While in the past, the Federal reserve and the Bank of England have been rather light handed with their monetary approaches – their aggressive recapitalisation of banks and injections of liquidity into the markets in late 2008 and early 2009 have won the respect of many of those working in the finance industry such as myself.