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Wednesday, March 18, 2009

Fed goes for "shock and awe"

The FOMC met this week and released their statement today. As expected, they held rates steady between 0 and 1/4 percent. The interesting and unexpected part of the statement is as follows:
"To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further 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, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."
The Fed has alluded to buying Treasuries in the past but this is the first time they have come out and said it was something that was definitely going to happen. The market was also completely unprepared for the commitment to buy billions more mortgage-backed securities and agency debt.

The new TALF program was also mentioned:
"The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets."
The phrase "likely to be expanded" seems to confirm the story reported on Bloomberg today that the TALF would be used to help clean up bank balance sheets. Apparently, the TALF would provide loans to investors and agree to take frozen, illiquid (toxic) debt as collateral.

Two comments on the Fed action today:
  1. These actions imply the Fed is more worried about the state of the economy than all the recent "happy talk" would suggest. Otherwise, why come out with three major announcements totaling over a trillion dollars plus the expansion of the TALF which has not even gotten off the ground yet.
  2. Now that they have announced all these actions, it begs the question of whether the Fed is running out of ammunition.
In any case, it's clear market participants liked this announcement. Let's hope these actions actually work and we don't need any further drastic measures. After all, if a trillion dollars can't buy some prosperity we're really in trouble.

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