The Federal Reserve will replace some bonds in their portfolio with longer-term Treasuries in an effort to reduce borrowing costs, the Federal Open Market Committee said today in Washington. The central bank will buy $400 billion worth of bonds with maturities of six to 30 years between now and June 2012, while simultaneously selling an equivalent amount of debt maturing in three years or less.
Hot Feature: European Central Banks Are Hungry for Gold
In buying longer-term debt, the FOMC hopes to “put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” according to a statement released this afternoon. The Federal Reserve will also reinvest maturing mortgage debt into mortgage-backed securities.
Today’s action, being called “Operation Twist” after a similar Fed action in 1961, should lower interest rates in the same way that quantitative easing did, but without the Republican criticism arising from its money creation last year. The Fed also stuck by plans to keep the benchmark interest rate near zero through mid-2013. The target federal funds rate for overnight interbank loans has ranged between zero and 0.25% since December 2008.
The Federal Reserve’s System Open Market Account held $2.64 trillion in securities as of September 14, of which $1.65 trillion was in Treasury notes, bills, and inflation-protected bonds, while $995 billion was in mortgage debt. Between December 2008 and June of this year, the central bank purchased $2.3 trillion in debt as part of its two rounds of quantitative easing, meant to lower borrowing costs for companies and consumers.
Today’s announcement surprised investors. Though an “Operation Twist” had been rumored ahead of the Fed’s statement, few expected the Fed to purchase so many securities, at least not initially. The Fed currently holds $1.56 trillion in Treasury notes, of which 19% mature in less than two years, while 35% mature in two to five years and 36% mature in five to ten. Only 10% of the Fed’s Treasury notes — worth about $156 billion — mature in ten to thirty years, which led 71% of polled analysts to speculate that the Fed would try to age its portfolio, though 61% said the move would probably fail to reduce unemployment