The Federal Open Market Committee did a whole lot of nothing with the funds rate, but a whole lot of something with the Federal Reserve’s purchase  allowances, at its meeting last week. It left the Federal Reserve’s federal funds rate target range unchanged at zero to 0.25 percent. On the other hand, it empowered the Fed to buy another $750 billion worth of GSE mortgage-backed securities, bringing the total to as much as $1.25 trillion; the Fed will double its purchase of agency debt to $200 billion, too. The FOMC also okayed the purchase of up to $300 billion of long-term securities in the next six months. In all, that’s an extra $1.05 trillion from the Fed.

Citi research strategist John Fenn writes in his weekly note that the FOMC meeting “was able to provide the market with a WOW,” but he cautions that its attempt to bolster the mortgage market will be of limited success: “Although this keeps the secondary market for agency securities liquid, past experience shows inconsistent results wit respect to the rates quoted to borrowers.” When the Fed first stepped into this market, ”lending rates dropped but later retraced,” notes Fenn. “Even though this may not happen again, we would question whether or not the agency or conforming mortgage rates are the problem when it comes to stimulating home purchases.”

The Treasuries buy could be more unreservedly positive, Fenn believes. “For corporate borrowers, the benefit is that underlying Treasuries are the benchmark for securities pricing (although not as much as in high yield) so that borrowers would effectively get a rate reduction. More importantly, we believe risk markets should benefit from the application of the “all available tools” standards. The Fed is essentially saying the kidding around is pretty much over,” writes Fenn.

“The long awaited news of the Federal Reserve’s ‘quantitative easing’, it’s purchase of long-term Treasuries as well as its purchases of mortgage-backed securities has initially helped the stock market and brought mortgage interest rates down a bit,” says Timothy A. Canova, professor of international economic law and associate dean for academic affairs at Chapman University School of Law.  “It’s also hurt the bond market and the value of the dollar.”

Canova is unconvinced that the Fed moves will boost economic activity. “I don’t see lower interest rates as providing much stimulus at a time when the credit system is de-leveraging through margin calls.” He’s also unpersuaded that “people and businesses will rush out to borrow for new investments at a time when the marginal efficiency of capital is in negative territory.” While borrowing at lower rates is fine, Canova adds, the current government stimulus  isn’t “putting enough purchasing power into the hands of the middle class to sustain an economic recovery. Much of the stimulus will be counter-balanced by spending cuts and tax increases at the state and local levels.”

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