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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.


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06 Jan 09 Federal Reserve Must Have Exit Strategy for Mortgage Loan Programs

In a recent Bloomberg article written by Vivien Lou Chen announces that the Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. central bank must have a “timely” plan for ending lending programs created since the start of the global financial crisis.   “Many of the interventions are novel, so no straightforward methods are available to quantify their effectiveness,” Yellen said in remarks prepared for a speech today in San Francisco. “The Fed must ensure that it has an exit strategy to wind down the facilities in a timely and effective way when they are no longer needed.”

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Fed Chairman Ben Bernanke has created more than $2 trillion of emergency mortgage lending programs since December 2007, using the Fed’s balance sheet and money-creation authority to cushion the economy from the credit crunch. Yellen’s remarks come less than three weeks after Fed policy makers cut the federal funds rate, or the rate banks charge one another for overnight loans, to as low as zero for the first time. The central bank also shifted its focus to the amount and type of debt it buys. “Conditions are still abnormal, but money market functioning has clearly improved relative to the dark days of last September and October,” Read the original article>


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