Citing job losses, declining equity and housing wealth, and tight credit conditions, the Federal Open Market Committee (FOMC) decided today that additional purchases of credit instruments was required in order to promote economic recovery and to preserve price stability.
The FOMC announced it will purchase up to $300 billion of longer-term Treasury securities over the next six months in order to improve credit conditions.
The move is likely to drive up Treasury prices as it pushes down rates, lowering the cost for the U.S. government to borrow as it expands the 2009 fiscal deficit to an estimated $1.5 trillion. The move should also help lower borrowing costs for things like mortgages and auto loans.
Mortgages for 30 year terms have averaged about 175 basis points above the benchmark 10-year Treasury note over the last decade. Mortgage rates were recently about 210 basis points above recent Treasury yields.
But the move could hurt bank profits as they receive lower rates for loans they make.
Additionally, the FOMC announced it would expand its balance sheet by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, in order to provide greater support to mortgage lending and housing markets.
It will also increase purchases of agency debt by up to $100 billion to a total of up to $200 billion.
“Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract,” the FOMC said in the statement.
Officials noted that weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment, and they acknowledged that U.S. exports have slumped as a number of major trading partners have also fallen into recession.
The committee kept its target overnight rate to a range of between 0.00% to 0.25%, and said conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee expects that inflation will remain subdued.
Today's action was passed by unanimous vote. 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 at previous meetings.
Officials said that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. But they didn't provide a timetable for improvement in the economy.
The Fed announced the start of the Term Asset-Backed Securities Loan Facility (TALF), which is designed to facilitate the extension of credit to households and small businesses. Officials anticipate that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.
Stocks rose sharply after the announcement was made and the dollar weakened considerably against the better yielding euro, pound and Australian dollar. EUR/USD went from 1.3120 just prior to the statement to 1.2290 within 15 minutes. The pound rose to 1.4225, its highest level since March 6.