bobbyw24
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Fed to Expand Its Balance Sheet Further … Buying Treasuries!
by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist,
Charles Schwab & Co., Inc.
March 18, 2009
To no one's surprise, the Federal Reserve's monetary policymaking committee, the Federal Open Market Committee (FOMC) announced today that it has decided to keep its target overnight interest rate, the federal funds rate, in a range of 0%–0.25%.
Since the Fed has exhausted its traditional rate cut mechanisms, it announced today the increase in the size of its balance sheet, saying it will buy Treasury securities and increase its purchases of mortgage and agency debt in an effort to bolster housing and hasten the end of the recession.
"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," the FOMC said in its statement today. "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."
This is on top of an existing commitment to buy $600 billion of mortgage-backed securities and bonds sold by government-sponsored housing agencies. The Fed added that it will "increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion."
Markets love it
The markets' reactions were immediate, with a quick reversal into positive territory for the major equity indexes and a spike in the prices (plunge in the yields) for Treasury securities. As many varieties of debt, including mortgages and corporate bonds, are linked to Treasury rates, the ripple effect could be significant.
On readers' to-do list: Call your mortgage servicer and ask about refinancing options. In addition to driving mortgage rates lower, another goal of Treasury purchases is to drive new capital flows out of Treasuries into higher-risk assets.
Taking a page out of the U.K. book
The U.S. Fed now falls in line with other central bankers who have unleashed their own "quantitative easing": The Bank of England (BoE) is buying government bonds ("gilts") and corporate debt, the Bank of Japan (BoJ) is purchasing government notes and making subordinated loans to banks, and the Swiss National Bank (SNB) is intervening to weaken the Swiss franc.
It may be the success of efforts by the BoE that spurred our Fed to action, given that Fed Chairman Ben Bernanke made only tepid comments about the idea of buying Treasuries earlier this month. But in the United Kingdom, yields dropped 60 basis points, to a 20-year low, after the BoE announced its gilts purchases.
The last time the United States set out to influence long-term interest rates was during the Kennedy administration's "Operation Twist," the purpose of which was to lower long-term interest rates in order to stimulate business investment, expand income and employment, and stem the rush to gold.
TALF expansion
According to its statement, the Fed also said it will consider expanding the Term Asset-Backed Securities Loan Facility (TALF) to include "other financial assets." As it's currently structured, the TALF may lend as much as $1 trillion to investors (hedge funds, pension funds, insurance companies, etc.) to buy recently created securities backed by loans for autos, education and real estate.
Applications for its first loans are due tomorrow and indications are that the program is oversubscribed.
Broadening the TALF to include older, illiquid and lower-rated securities could allow the participants in the Treasury Department-planned public-private investment fund to potentially repackage assets and sell them on to a wider group of investors.
The Federal Deposit Insurance Corporation (FDIC) may also gain an expanded role, could aid in financing the initiative, and might even run a proposed "aggregator" style bank that could purchase whole loans (those not securitized).
The net is this is very good news and adds to building the case for riskier assets, including equities.
As always, if you have questions or need help, please contact your Schwab consultant. If you're not yet a Schwab client but would like to learn more, a Schwab consultant can help. Call 800-435-4000 to get started.
by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist,
Charles Schwab & Co., Inc.
March 18, 2009
To no one's surprise, the Federal Reserve's monetary policymaking committee, the Federal Open Market Committee (FOMC) announced today that it has decided to keep its target overnight interest rate, the federal funds rate, in a range of 0%–0.25%.
Since the Fed has exhausted its traditional rate cut mechanisms, it announced today the increase in the size of its balance sheet, saying it will buy Treasury securities and increase its purchases of mortgage and agency debt in an effort to bolster housing and hasten the end of the recession.
"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," the FOMC said in its statement today. "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."
This is on top of an existing commitment to buy $600 billion of mortgage-backed securities and bonds sold by government-sponsored housing agencies. The Fed added that it will "increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion."
Markets love it
The markets' reactions were immediate, with a quick reversal into positive territory for the major equity indexes and a spike in the prices (plunge in the yields) for Treasury securities. As many varieties of debt, including mortgages and corporate bonds, are linked to Treasury rates, the ripple effect could be significant.
On readers' to-do list: Call your mortgage servicer and ask about refinancing options. In addition to driving mortgage rates lower, another goal of Treasury purchases is to drive new capital flows out of Treasuries into higher-risk assets.
Taking a page out of the U.K. book
The U.S. Fed now falls in line with other central bankers who have unleashed their own "quantitative easing": The Bank of England (BoE) is buying government bonds ("gilts") and corporate debt, the Bank of Japan (BoJ) is purchasing government notes and making subordinated loans to banks, and the Swiss National Bank (SNB) is intervening to weaken the Swiss franc.
It may be the success of efforts by the BoE that spurred our Fed to action, given that Fed Chairman Ben Bernanke made only tepid comments about the idea of buying Treasuries earlier this month. But in the United Kingdom, yields dropped 60 basis points, to a 20-year low, after the BoE announced its gilts purchases.
The last time the United States set out to influence long-term interest rates was during the Kennedy administration's "Operation Twist," the purpose of which was to lower long-term interest rates in order to stimulate business investment, expand income and employment, and stem the rush to gold.
TALF expansion
According to its statement, the Fed also said it will consider expanding the Term Asset-Backed Securities Loan Facility (TALF) to include "other financial assets." As it's currently structured, the TALF may lend as much as $1 trillion to investors (hedge funds, pension funds, insurance companies, etc.) to buy recently created securities backed by loans for autos, education and real estate.
Applications for its first loans are due tomorrow and indications are that the program is oversubscribed.
Broadening the TALF to include older, illiquid and lower-rated securities could allow the participants in the Treasury Department-planned public-private investment fund to potentially repackage assets and sell them on to a wider group of investors.
The Federal Deposit Insurance Corporation (FDIC) may also gain an expanded role, could aid in financing the initiative, and might even run a proposed "aggregator" style bank that could purchase whole loans (those not securitized).
The net is this is very good news and adds to building the case for riskier assets, including equities.
As always, if you have questions or need help, please contact your Schwab consultant. If you're not yet a Schwab client but would like to learn more, a Schwab consultant can help. Call 800-435-4000 to get started.
