Fed to Boost Share of Long-Term Treasurys
The Federal Reserve approved further action on Wednesday to help revive the slumbering U.S. economy through the purchase of $400 billion in long-term securities in an effort to reduce long-term borrowing costs and give a jolt to the staggering housing sector.
The move, referred to as "Operation Twist" after a similar Cold War era monetary maneuver, was widely expected, if not as large as some had predicted or hoped for. The Dow Jones Industrial average dipped lower into negative territory on the announcement.
Three members of the influential Federal Open Markets Committee, which sets much of U.S. fiscal policy, dissented from the plan, revealing again a rift between those members of the FOMC who approve of additional measures to stimulate the economy and those who dont.
The move shifts the Feds $2.8 trillion bond portfolio toward more long-term securities.
"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated," Fed said in its statement.
The Fed said it will also reinvest proceeds from maturing mortgage and agency bonds back into the mortgage market, a sure sign of concern that the U.S. housing market needs all the help it can get.
Peter Boockvar, equity strategist at Miller Tabak, said the move was unlikely to have much of an impact.
Bottom line, the FOMC gave the market exactly what was expected still believing in their monetary powers to cure the economic ills that ail us, he wrote in a note to clients after the announcement.
When you misdiagnose the disease (hangover from too much borrowing/debt) however, you give the wrong treatment (to induce more borrowing/debt) and the Fed continues to perpetuate this and they wonder why the medicine doesn't work, he wrote.
The three dissenting members were identified as Richard Fisher, president of the Dallas Fed, Charles Plosser of Philadelphia and Narayana Kocherlakota of the Minneapolis Fed, the same group that voted against a move last month to keep interest rates at historically low levels through mid-2013.
The dissenters fear further stimulative action could push inflation higher.
The Fed acknowledged in its statement Wednesday that rising inflation is a concern, but said it will keep a close watch on inflation indexes moving forward.
Analysts at Goldman Sachs forecasted the move ahead of the announcement, predicting the asset shift would occur despite concerns for rising inflation.
Measures of core inflation have recently acceleratedthe core CPI reached 2.0% year-over-year in Augustbut we do not believe this will stand in the way of easing at the meeting. Fed officials have made clear that they expect inflation to cool as the effects of a rise in commodity prices and supply-chain disruptions in the auto sector wane, the analysts wrote.
The move is likely to heighten the discord within the ranks of the Fed and among Congressional Republicans who oppose additional measures that ease fiscal policy by artificially pumping cash into the economy.
Within the Fed, the existence of a rift between Fed Chairman Ben Bernanke, who has supported an interventionist strategy, and a handful of regional Fed presidents, who dont, has been well documented. That rift appears to have grown much wider as the economic recovery has all but stalled over the summer.
The dissenters on the FOMC have grown skeptical of the easy money policies advocated by Bernanke and the rest of the majority. Those policies have included two-and-a-half years of interest rates at a record-low range of 0% to 0.25%, and artificially pumping cash into financial markets through the purchase of U.S. Treasuries, a strategy known as quantitative easing.
That skepticism is shared by many members of Congress, particularly Republicans and those who identify with the fiscally conservative tea party movement.
Indeed, the widening rift among FOMC members is reminiscent of the deep divide in Congress over U.S. fiscal policy moving forward.
With that in mind, top GOP congressional leaders wrote to Bernanke this week urging the central bank to desist from further economic interventions, echoing criticism voiced by Republican presidential candidates in recent weeks.
"We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy," Republican congressional leaders wrote in the letter to Bernanke, which they released on Tuesday.
Fed officials, however, believe that by shifting their bond holdings they could encourage mortgage refinancing and push investors into riskier assets, such as corporate bonds and stocks, without stoking a run-up in consumer prices.
Faced with a stubbornly high unemployment rate, consumer and business confidence sapped by a troubling U.S. credit downgrade, and an escalating sovereign debt crisis in Europe, Fed officials have repeatedly signaled they would seek to prevent already sluggish U.S. growth from weakening further.
There is considerable fear that the U.S. is slipping back into recession.