Thursday, Aug. 13
Posted 8 a.m. Eastern
Fed to wean markets from Treasury buybacks
As expected, the Federal Open Market Committee left short-term interest rates unchanged and used the same exact language to indicate it will be quite a while before it raise rates. There were, however, two notable remarks in today's Fed meeting statement.
The first pertains to the broad economy, with the Fed saying that "economic activity is leveling out." The significance of the switch represents a shift from things-are-getting-bad-at-a-slower-pace to we've-hit-bottom.
Secondly, the Fed did address the $300 billion Treasury buyback program slated to expire in September. The Fed appears to have found some middle ground between continuing the program and adhering to the original timetable. The Fed will slow the pace of the purchases so that the buybacks cease by the end of October rather than in September.
Is this good news? Well, it is better than quitting cold turkey in another month, but it won't do much to rein in interest rates if economic data continues to improve or inflation concerns ignite.
Let me put this in a bit of context. The Fed has already purchased $250 billion out of the $300 billion slated for the program. They didn't increase the amount -- they'll still buy the remaining $50 billion but take an extra month to do so. But it will be of limited help in reining in interest rates because the Treasury continues to increase the amount being issued. Just today, the Treasury issued $23 billion, on top of the $37 billion yesterday and will do another $15 billion tomorrow. So the Treasury issued more debt in the past day and a half than the Fed will buy back in the next two and half months.
The Fed also deferred any mention about mortgage-backed securities buybacks, which total $1.25 trillion out of $2 trillion in expected total mortgage originations this year. That is the big kahuna in terms of impact on mortgage rates -- but we'll wait until September, November or December to get any details.