The Fed’s Economic Stimulus Plan You Didn’t Know About

In the next year, the Federal Reserve is likely to buy at least $300 billion worth of long-term treasuries, about half the size of quantitative easing program, or QE2, which ends this week after 8 months. In addition to $600 million in QE2 purchases, the Fed has purchased $250 billion in long-term treasuries, reinvesting principals from other matured securities. And if the Fed continues to reinvest those principals, it will remain one of the major buyers of U.S. treasuries.

However, even with the Fed’s continued purchasing, bond yields, which move counter to prices, are expected to rise as other investors divest themselves of their bonds as the economy recovers and more attractive investments surface, those inherently more risky but with the potential for greater earnings. The Fed’s purchases will help to slow the rise of yields, though.

The Fed still has over $1 trillion in mortgage-backed securities and other long-term bonds, some of which will mature in the next few months, allowing the Fed to roll them over into new bond purchases. If the Fed were to stop reinvesting these principals, it would effectively raise interest rates and remove money from the economy

Some policymakers are worried that the bond buying will cause inflation and hurt the value of the dollar, but with the economy still hurting, the time isn’t yet ripe for them to remove this stimulus.

Also read: Federal Reserve: Implementing the Dodd-Frank Act>>

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