To help improve conditions in private credit markets, the FOMC decided to purchase up to $300 billion of longer-term Treasury securities over the next six months

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The Federal Reserve on Wednesday surprised financial markets and committed to buy $300 billion in longer-term Treasurys to help the struggling American economy recover. The Fed also tweaked its other credit-easing programs by committing to buy more mortgage-backed securities and agency debt and include more asset-backed securities under a new credit facility starting this week.

Most analysts had thought that the Federal Open Market Committee - the policy making arm of the central bank -- would keep the weapon of buying Treasurys in reserve in case of a crisis. The decision to buy Treasurys shows that the crisis is here. "To provide greater support to mortgage lending and housing markets," the FOMC said it would purchase an additional $750 billion of agency mortgage-backed securities. This brings the total amount of agency mortgage-backed securities to $1.25 trillion. The Fed said it would double its purchase of agency debt to $200 billion.
"Moreover, to help improve conditions in private credit markets, the FOMC decided to purchase up to $300 billion of longer-term Treasury securities over the next six months," the statement said.

In addition, many unspecified types of assets will be included in the newest Fed credit facility, the Term Asset-Banked securities. All of these purchases will increase the size of the Fed's balance sheet. The central bank has already doubled the size of its balance sheet to just below $2 trillion. No shoots of recovery noted

The Fed was more pessimistic about the economic outlook, in a statement released after its two-day meeting. Officials removed language saying they expected the economy to recover later this year. The Fed repeated that deflation was a risk to the economy. The Fed said the economy was "weak" and latest information only showed further contraction. There was no mention of any "green shoots" of recovery that Fed chief Ben Bernanke mentioned seeing in his interview on Sunday with 60 minutes. Economists expect that the economy is shrinking at a 4.8% annual rate in the first three months of this year. Growth fell 6.2% in the fourth quarter of 2008. The Fed said that it still believed that the programs that it has put in place, combined with fiscal stimulus, would be able to pull the economy out of the ditch. The vote on the statement was unanimous.

Experts said the Fed would likely concentrate its Treasury purchases in the 3-to 10-year range.
"Our guess is that the bulk of the Fed's purchases would be in the 3-to10-year range," wrote Lou Crandall, economist at Wrightson ICAP in a note to clients. He said the Fed would not concentrate in the 20-30-year sector because it is not a critical source of funding for private-sector borrowers."

There are two reasons to buy Treasurys. The Fed would like to lower credit spreads on other loans. Some Fed officials may have supported the move because the purchases fall under the control of the full FOMC with the district bank presidents.
The other Fed programs are controlled in Washington by the Fed board of governors


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