Fed Gives Market What It Wants; Will Reinvest Mortgage Proceeds In Treasuries
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.
– FOMC Statement, August 10
There was endless speculation about what the Fed would do at this meeting leading up to it. The Wall Street Journal ran a front page story last Tuesday suggesting that they were “mulling” something like this:
The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. Any change—only four months after the Fed ended its massive bond-buying program—would signal deepening concern about the economic outlook. If the Fed’s forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy (“Fed Mulls Symbolic Shift: Officials Consider Putting More Money Into Bond Market As Recovery Wavers”, Jon Hilsenrath, The Wall Street Journal, August 3, A1).
This not a huge new Quantitative Easing 2.0 program. It is real money – about $200 billion this year according to the WSJ article – but it is more symbolic of the Fed’s willingness to do whatever necessary to support the economy.