The Fed announces that long-term treasury purchases will more than triple

Not that this was a surprise to anyone.  Bernanke, et al. have decided to purchase an additional $75BB per month until the second quarter of 2011.  Right now the Federal Reserve is purchasing about $30BB per month from the runoff of the mortgages on their balance sheet.  This will push their total purchases of long-term treasuries to about $105BB per month, which is 3 1/2 times the current purchases. 

The problem is two fold.  It will be good for the bond market and unclear for the stock market.   Yields on long-term debt will go down, effectively flattening out the yield curve. Discounts rates will go down, making future money worth more, thereby having a positive effect on stock returns.  But, if the long term rates go down, the yield curve flattens which has been associated with low stock market returns and recessions.

Our take can be summed up with what Paul Ballew a former Senior Economist with the Federal Reserve has said, via Bloomberg:

“The bottom line is that fundamental problems remain in the economy that monetary policy isn’t going to fix.  Risks remain out there that overly aggressive monetary policy can cause unintended consequences.”
Full transcript via Fed:
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.
...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.


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