12 Aug 2009

Fed: We Will Continue to Monetize the Debt Through October

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That’s not the exact spin that CNBC gave to the story:

The Federal Reserve said Wednesday it will extend the duration but not the dollar amount of a program to buy long-term government securities, and said the economy was showing signs of leveling out after 20 months of recession.

The Fed, the US central bank, also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period.

The Fed said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities so that it will shut down at the end of October, a month later than previously scheduled. It has bought $253 billion of the securities so far.

The program is aimed at lowering rates on mortgages and other consumer debt, a move to spur Americans to spend more. But its effectiveness has been questioned by some on Wall Street and on Capitol Hill who worry that the program makes it look like the Fed is printing money to pay for Uncle Sam’s exploding deficits.

A fairly weak auction of $23 billion in 10-year notes sent a clear signal that investors were waiting to see what the Fed had to say at the before making any big moves. The 10-year auction’s bid-to-cover ratio, a measure of demand, was 2.49 percent, down sharply from 3.28 percent at a similar auction in July. Indirect bids, an indication of foreign buying, were lower than at recent auctions.

US Treasury prices tumbled after the Fed statement in apparent disappointment that the Fed did not increase the amount of debt that it plans to buy.

Although consumer spending has stabilized, job losses, sluggish income growth, hits to wealth from tanking home values and still hard to get credit could make Americans cautious in the months ahead, the Fed said.

The Fed expressed confidence that its low rates and other aggressive actions so far will gradually help bolster the economy. Even so, economic activity probably will “remain weak for a time,” the Fed warned.

Against that backdrop, the Fed said inflation is likely to stay “subdued.” Fed policymakers predicted that idle factories and the weak employment market will make it hard for companies to jack up prices.

While unemployment dipped to 9.4 percent in July, the Fed says it’s likely to top 10 percent this year because companies won’t be in a rush to hire.

The Fed didn’t make any changes to another program that aims to push down mortgage rates.

In that venture, the Fed is on track to buy $1.25 trillion worth of securities issued by mortgage finance companies Fannie Mae and Freddie Mac by the end of the year. The central bank’s recent purchases have totaled about $542.8 billion. [Bold by RPM]

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