17 Mar 09 Federal Open Market Committee Striving to Free Credit
The Federal Reserve is likely to hold off on using one of its last weapons to get credit flowing buying back Treasury securities from the open market because it has already made progress driving mortgage interest rates down in markets that would benefit from such a step, investors and strategists say.
When the Federal Open Market Committee releases in a statement on interest-rate policy Wednesday afternoon, culminating a two-day meeting, members may hew closely to January’s statement saying, namely, that the Fed retains the option of purchasing Treasuries if conditions warrant. For the last four months, the Fed has discussed buying Treasuries to exert pressure designed to lower rates on the many corporate, home mortgage and consumer loans linked to benchmark government debt. But at the same time, mortgage rates have fallen by a half percentage point, probably thanks to the Fed’s purchases of mortgage-related assets.
That drop, according to observers, has had the effect of reducing any sense of urgency about proceeding with Treasury purchases. “I don’t think they will buy Treasuries,” said Andrew Harding, chief investment officer in fixed income at Allegiant Asset Management. “I think they’re doing pretty darn well buying mortgages directly,” he said. Keeping their Treasury plans vague would also give Fed officials time to see if similar plans announced last week by the Bank of England and the Swiss National Bank bear fruit, and how markets respond to earlier programs and the swelling issuance of government debt. It has good reason to tread carefully: Buying Treasuries on the open market could lead to higher inflation — the enemy of Fed and bondholders alike. For now, the Fed may not feel pressure to tamper with Treasuries because yields are still historically low.
Tags: Federal Open Market Committee, Federal Reserve, home mortgage, mortgage interest rates
