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• SEPTEMBER 22, 2011
Fed Launches New Stimulus
Dramatic Recasting of Securities Holdings Aims to Reduce Long-Term Rates
By JON HILSENRATH And LUCA DI LEO
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The Federal Reserve Wednesday said it would increase its share of longer-term Treasurys by $400 billion by June 2012 in an effort to make credit cheaper and spur spending and investment. David Wessel has details on The News Hub.Federal Reserve Chairman Ben Bernanke, acting more aggressively than expected, launched a new package of measures to support a limping economy and once again took the kind of unconventional approach that has become a trademark of his tumultuous five-year tenure running the central bank.
The latest move by the chairman was a decision to dramatically recast the Fed's $2.65 trillion securities portfolioin an effort to reduce long-term interest rates. The Fed plans to shift its holdings so it will have more long-term U.S. Treasury bonds and more mortgage debt than previously planned. It hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector.
The shift toward longer-term Treasury securities was largely expected but slightlybigger than many in the markets had anticipated, and the action on mortgage bonds was a surprise.
The decision didn't come without the kind of controversy that also has defined Mr. Bernanke's tenure at the Fed. Three of 10 voting Fed officials opposed the action at the conclusion of a two-day meeting, saying they didn't want new measures now. The moves came just days after Republican congressionalleaders took the unusual step of sending Mr. Bernanke a letter urging the Fed to do nothing, fearing any action could do more harm than good. He effectively ignored them.
Though the moves were a bit bolder than analysts expected, they weren't seen as the kind of game-changing program that could turn the economy around, a conclusion that was reflected in the markets Wednesday. The Dow JonesIndustrial Average finished the day down 283.82 points, or 2.49%, to 11124.84. Some of the Fed's moves were well anticipated and could have been seen by some investors as a chance to unwind trades.
Asian markets fell on Thursday morning, with Japan's Nikkei Stock Average down 1.5%, Australia's S&P/ASX 200 down 2.3% and South Korea's Kospi Composite down 2.6%.
In Wednesday trading yields on 10-yearTreasury notes fell to 1.87%, their lowest level on record going back to 1977, which was one effect the Fed was hoping to have. The Fed's move to keep more of its portfolio in mortgage bonds "should pull our rates down" too, said Lou Barnes, a mortgage banker at Premier Mortgage Group in Boulder, Colo.
But analysts were cautious. "It may help a little bit at the edges," said James Hamilton, aUniversity of California San Diego professor who has been studying the impact of the Fed's policies, but he added that "nobody should have illusions that the policies will get the economy jumping again."
Under the new program, which resembles a 1961 Fed-Treasury program called "Operation Twist," the Fed will sell $400 billion in Treasury securities that mature within three years and reinvest theproceeds into securities that mature in six to 30 years, significantly tilting the balance of its holdings toward long-term securities. In addition, it will take the proceeds from its maturing mortgage-backed securities and reinvest them in other mortgage-backed securities. For the past year, it has been reinvesting that money into Treasury bonds, shrinking its mortgage portfolio.
Fed officials havebecome more concerned about the health of the mortgage market in recent months, with senior officials, including Mr. Bernanke, urging the rest of the government to find ways to support the sector. There has been growing concern in the mortgage industry in recent weeks that even as U.S. Treasury yields have been declining, mortgage rates haven't fallen as much, preventing many homeowners from...
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