The Federal Reserve Open Market Committee on Wednesday announced it will purchase $400 billion in longer-term securities and sell an equal amount of short-term ones by June 2012, in an effort to boost the struggling economy.
The Fed will purchase Treasury securities with remaining maturities of six to 30 years and sell the same amount of Treasury securities with remaining maturities of three years or less. “The committee is prepared to adjust those holdings as appropriate,” the Fed said in a statement. The Fed will also reinvest its principal payments in agency mortgage-backed securities.
“This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the statement said.
The committee also kept the federal funds rate at the zero to 0.25% target range that it set at its August meeting, noting that economic conditions “are likely to warrant exceptionally low levels at least through mid-2013.”
The market plunged following the announcement. The Dow Jones industrial average closed down 283.82, or 2.49%, at 11,124.84; the S&P 500 fell 35.33, or 2.94%, ending at 1,166.76; and the Nasdaq composite closed down 52.05, or 2.01%, at 2,538.19. All numbers are preliminary.
Bond managers saw the securities move as a mildly positive step, but one with limited expectations.
“The bond market is responding, which is what the Fed is trying to achieve. Whether it continues remains to be seen,” said Tom Fahey, senior global macro strategist for Loomis Sayles, adding that he applauds the Fed’s willingness to be creative.
J. David Hillmeyer, vice president, portfolio manager and head of investment-grade corporate trading at Delaware Investments, doesn’t expect much from the Fed’s move. “The Fed is in uncharted waters and the only thing they can try to do is throw liquidity at it, but there is no one solution. I don’t think the overall risk appetite is going to change. The risks are the same as they were yesterday.”
Confidence is the bigger issue, agrees Eric Green, director of research at PENN Capital Management. “We’re in a crisis of confidence. Politicians crushed confidence. This is just another baby step in trying to rebuild it.”