Federal Reserve to buy Treasuries

Bloomberg

By committing to buy Treasuries and double his purchases of mortgage debt, Federal Reserve Chairman Ben S. Bernanke signaled his determination to avoid a repeat of the Great Depression and his willingness to pump as much cash into the economy as needed to end the current crisis.

The Fed decided Wednesday to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to lower home-loan and other interest rates. The Fed kept its main rate at almost zero and may keep it there for an "extended" time.

The moves sparked the biggest drop in 10-year Treasury yields since 1962, rallies in the stock market and gold and a plunge in the dollar against the euro. Economist Richard Hoey said Bernanke has created the "Rambo Fed," referring to the Sylvester Stallone character skilled with weapons.

"This is a very powerful ... move," Hoey, chief economist at Bank of New York Mellon, said. "One of the reasons I’ve been arguing we won’t have a depression is we’ve got a Fed chairman who understands the problem."

With the purchases of Treasuries and housing debt, Bernanke is effectively using the Fed’s powers to print money and aim it where he and other officials believe it will have the greatest impact in lowering borrowing costs.

Unanimous decision

The Federal Open Market Committee’s decision was unanimous, indicating the agreement to start buying Treasuries quelled disputes over how the central bank should expand its balance sheet. Richmond Fed President Jeffrey Lacker and others favored government-debt purchases instead of intervening in credit markets, as Bernanke has pioneered in the past six months.

Bernanke has studied the Great Depression extensively and published a book of his papers on the subject in 2000. In 1929, the Fed was "essentially leaderless and lacking in expertise," Bernanke said in a November 2002 speech. The situation led to decisions that were associated with a "massive collapse of money, prices, and output," he said.

Wednesday’s decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government-sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.

The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt as of March 11.

Jumpstarting lending

The $1 trillion Term Asset-Backed Securities Loan Facility, which is opening this week to jumpstart consumer and business lending, "is likely to be expanded to include other financial assets," the FOMC statement said.

The Obama administration is considering melding the Treasury’s plan to set up private investment funds to buy frozen assets with the Fed program, known as the TALF, people familiar with the matter said. Treasury Secretary Timothy Geithner may make an announcement as soon as this week, after his first unveiling of the strategy caused a sell-off in financial stocks.

"This is not really a victory for Lacker," said James O’Sullivan, a senior economist at UBS Securities in Stamford, Connecticut. "Lacker seems to be arguing for Treasury purchases instead of targeted programs. They are instead supplementing the targeted programs. They are just using all tools."

The New York Fed will concentrate Treasury purchases among two- and 10-year securities. The transactions will take place two to three times a week, and the Fed may also buy other maturity Treasuries and Treasury Inflation-Protected Securities, according to a New York Fed statement.

The moves may more than double the Fed’s balance-sheet assets by September to $4.5 billion from $1.9 trillion, said John Ryding, founder of RDQ Economics in New York.