Institut de Recherches Économiques et Fiscales

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Pour la liberté économique
et la concurrence fiscale

IREF - Institut de Recherches Économiques et Fiscales
Pour la liberté économique et la concurrence fiscale

Fed to Buy Treasurys, Expand Balance Sheet

The commitment to buy Treasury securities and additional mortgage-related debt will almost certainly cheer Wall Street, since the combination should mean lower rates for a variety of business and consumer loans.

The Federal Open Market Committee voted 10-0 to hold the target federal-funds rate for interbank lending in a range between zero and 0.25% and to continue using credit programs financed by an expansion of the Fed’s balance sheet to stabilize markets.

Richmond Fed President Jeffrey Lacker, who dissented in January, went along with the rest of the FOMC this time. He had wanted the Fed to focus on Treasury purchases as opposed to targeted credit programs.

The discount rate for Fed loans was unchanged at 0.5%.

"Information received since the [FOMC] met in January indicates that the economy continues to contract," the Fed said.

Officials repeated their pledge to keep rates exceptionally low for an extended period. With rates near zero, the Fed has financed its various credit facilities via an increase in bank reserves — essentially printing money, as Fed Chairman Ben Bernanke explained in a "60 Minutes" interview aired Sunday.

The Fed will buy up to $300 billion in long-term Treasurys over the next six months, it said. The additional mortgage-backed securities purchases will push the Fed’s mortgage-related facility to as much as $1.25 trillion. The Fed also said it would increase the size of its agency debt purchase facility by $100 billion to $200 billion.

The Fed’s strategy appears to be to double down on the programs that it thinks work. In addition to commercial paper and money market mutual fund facilities, which appear to have stabilized those sectors, Mr. Bernanke has repeatedly highlighted the decline in mortgage rates in response to the agency and mortgage-backed securities facilities, calling it one of the "green shoots" evident in some markets.

The Fed also said it would like to expand eligible collateral for the Term Asset Backed Securities Loan Facility, or TALF. The TALF is aimed at spurring new lending in consumer, student loan, small business and real estate markets and could eventually total $1 trillion. The Fed is accepting applications for some of those TALF loans and will start dispersing funds next week.

As for the economy, the Fed said, "although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions...will contribute to a gradual resumption of sustainable economic growth." Exports, meanwhile, "have slumped," the Fed said, reflecting the global downturn.

U.S. gross domestic product is on track to decline 5% or more, at an annual rate, in the first quarter. It plunged at a 6.2% rate in the fourth quarter of 2008, the steepest in a quarter century. The pace of employment loss has stepped up since the January meeting, with the economy now shedding more than 650,000 jobs per month, pushing the unemployment rate to 25-year highs.

One nugget of good news is that consumer spending figures signaled some stabilization since the start of the year. Since consumption makes up about 70% of the economy’s output, a revival in spending would signal better times ahead. But economists are divided on how to interpret the January-February figures.

Officials made few changes to their assessment of inflation, repeating that it should stay subdued and may even persist for a while below rates the Fed thinks are consistent with a growing economy and price stability.

U.S. consumer prices rose for a second-straight month in February, the government said Wednesday, easing fears somewhat over prolonged price declines known as deflation.

However, consumer prices are up just 0.2% from a year ago, well below the 2% rate most Fed officials think is consistent with their long-term goals.

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