FedRes to Launch Fresh Bond Buying to Help Economy! Yeah Right "Help Economy"!
- Fed to launch fresh bond buying to help economy!
by Alister Bull 5 Dec 2012
(Reuters) – The Federal Reserve is set to announce a fresh round of Treasury bond purchases when it meets next week, avoiding monetary policy tightening to maintain support for the weak U.S. economy amid uncertainty over the looming year-end “fiscal cliff.”
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Many economists think the U.S. central bank will announce monthly bond purchases of $45 billion after its policy gathering on December 11-12, signaling it will continue to pump money into the U.S. economy during 2013 in a bid to bring down unemployment.
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“We expect status quo,” said Laurence Meyer of the forecasting firm Macroeconomic Advisers. “We expect purchases will continue at the same monthly rate as over the last three months; that the composition will be the same, and that the maturities distribution will be the same.”
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The decision would cement expectations that the Fed will keep buying a combined $85 billion of Treasuries and mortgage-backed bonds a month, while repeating that it expects to hold interest rates near zero until at least mid-2015.
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The Fed could even decide to announce a larger level of purchases if it wanted to exceed expectations and give the market a bigger jolt to press borrowing costs lower.
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“If the market expects $45 billion, maybe they should deliver $60 billion … get markets more excited and really push rates down,” said Torsten Slok with Deutsche Bank in New York.
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U.S. unemployment remains high at 7.9 percent and the economy, while doing better than Europe’s, is expected to grow at a meager rate of only around 2 percent next year.
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OPERATION TWIST
The fresh bond purchases will replace a program called Operation Twist, which expires at the end of the year. Under Twist, the Fed bought $45 billion of longer-dated bonds a month with the proceeds from the sale of its shorter-date holdings.
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Fresh outright purchases would therefore create new money, whereas no new action by the Fed would amount to a tightening in monetary policy as Twist came to an end.
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Add in monthly $40 billion mortgage-backed bond purchases which it began in September, this would boost the Fed’s balance sheet by $1.2 trillion, to $4 trillion, by end-2013 if it keeps buying assets at this pace, as economists expect.
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“I think it is going to be (maintained) into 2014 because they are not looking for much improvement in the unemployment rate over 2013,” said Stephen Oliner, a resident scholar at the American Enterprise Institute.
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The Fed has promised to maintain its efforts to stimulate growth until it sees a substantial improvement in the outlook for the U.S. labor market.
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