Finally, Fed Decides to Buy Longer-Term Treasuries

• The FOMC kept the fed funds rate steady and reaffirmed its commitment to keeping rates exceptionally low.
• The Fed now plans to begin buying Treasuries and will ramp-up its purchases of other asset class.
• The Fed commits to expanding its balance sheet by up to $1.15T.

As was widely expected by the markets, the FOMC kept the fed funds rates steady and reaffirmed its commitment to keeping rate at "exceptionally low levels" for some time. However, in a departure from the past, the Fed has explicitly committed to expanding its balance sheet by up to $1.15T by engaging in the purchasing of Treasuries, assets-backed securities and agency debts.

In a dramatic departure from its past actions and rhetoric, the FOMC stated that it will expand its balance sheet by purchasing up to $300B of longer-term Treasuries, an additional $750B of MBS and a further $100B of agency debt. In total, this amounts to an additional $1.15T in monetary stimulus to the U.S. economy, and it marks the official shift in the Fed’s policy towards quantitative easing – even though this was not explicitly stated in the communiqué. This decision, however, was not a complete surprise to us as we have seen a similar success shift in policy by the Bank of England, and this has been under serious consideration by the Fed for some time.

In the statement the FOMC noted that "the near-term economic outlook is weak", and despite the aggressive monetary and fiscal policy expansion over the past year, it expects only a "gradual resumption of sustainable economic growth." In terms of inflation, the Committee stated that it expects inflation to remain "subdued", and despite today’s CPI report, it goes on to express concerns about the risk that inflation may fall "below rates that best foster economic growth."

In the final analysis, the big news is the willingness of the Fed to veer in the relatively unchartered territory of quantitative easing with a specific focus on buying Treasuries, which to some extent is consistent with the stated goal to "employ all available tools to promote economic recovery and to preserve price stability." The purpose of engaging in the large-scale purchase of longer-dated Treasuries by the Fed will be to lower their yields on this asset class, which have generally been the benchmark for various borrowing rates in the economy.

TD Bank Financial Group

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