BIG NEWS - The Fed to Buy US Treasury Debt

This is big news. They have been talking about for awhile, but it looks like they are going ahead. If the Fed can pull this off we will not need the Chinese to the extent previously estimated and the Fed has a better chance of controlling inflation. Text in bold is my emphasis. From Market Watch:

The Federal Reserve on Wednesday said it would buy $300 billion in longer-term Treasury bonds to help arrest a deepening slide in the U.S. economy, a surprise move that sent stocks soaring and triggered violent moves in other markets.

The Federal Reserve's move, one of several actions taken Wednesday aimed at making it less expensive to borrow money, signaled it will boost the size of its balance sheet to more than $4 trillion. Today's moves double the amount of money the central bank has poured into the economy to try to stimulate economic activity.

"The Fed has upped the ante on its policy actions, and in a big way," said Richard Moody, chief economist at Forward Capital LLC in Austin, Texas.

Following the Fed decision, gold futures and U.S. stocks rallied, while the dollar plunged against other major currencies. The Dow Jones Industrial Average rose 73 points, or 1%, to 7,464.

In the bond market, Treasury prices soared, sending yields plummeting by the largest amount since 1987. Yields on the benchmark 10-year note, which move in the opposite direction from their prices, declined 47 basis points to 2.54%, the biggest drop since the stock market crashed in October 1987.

Gold futures soared $51.20, or 5.8%, to $940 an ounce on Globex, as the dollar tumbled against its rivals, particularly the yen and the euro. Oil futures also rose, reversing earlier losses.

The Fed moves Wednesday will add $750 billion to its other credit-easing programs by committing to buy more mortgage-backed securities and agency debt and including 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 as a last step in case the crisis deepened. The decision comes against a background of a worsening economic outlook, marked by falling housing prices and soaring unemployment, and follows a year of failed efforts to try to turn the economy around.

The Fed has already been very aggressive over the past year. It slashed interest rates to zero and started its credit easing program once it saw that its biggest fear - a self perpetuating downturn where a weak financial sector pushed down growth which would hurt the financial sector was coming to pass.

The Fed took special aim at the housing market.

"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. In addition, many unspecified types of assets will be included in the newest Fed credit facility, the Term Asset-Banked securities.

The Fed was more pessimistic about the economic outlook, in a statement released after its two-day meeting, than Chairman Ben Bernanke was in the last several days. 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 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 day's moves was unanimous.

Shortly after the Fed statement was released, the New York Fed said it would concentrate its Treasury purchases in the 2-to 10-year range.

Economists said this focus made sense.

Lou Crandall, economist at Wrightson ICAP in a note to clients, 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 is more than one reason for the Fed to buy Treasurys.

The Fed concentrated on the fact that it would like to lower credit spreads on other loans.
But some of the regional Fed bank presidents may have supported the move because the purchases fall under the control of the full FOMC where the presidents have influence.

The other Fed credit programs are controlled in Washington by the Fed board of governors.
With interest rates at zero, economists said it is hard to even know exactly how stimulate policy is at the moment.

Morgan Stanley economists estimated that interest rates should be negative 5% if that were possible give the magnitude of the recession.

Before the meeting there was a clear sense that the economy is still spinning its wheels despite the huge expansion in the Fed's balance sheet already.

Today's announcement, combined with measures in the works, brings the size of the balance sheet to more than $4 trillion.

Even this might be too little.

Jan Hatzius, economist at Goldman Sachs, said the Fed might have to expand its balance sheet to $10 trillion to restore growth.

Some economists don't think it is a good idea to buy longer-term Treasury securities.

"In fiddling with the yield curve, the Fed is playing with fire," said Robert Brusca, chief economist at FAO Economics.

He cited many academic studies that said the Fed will have a hard time pushing yields down.
"It's not a good idea. If cutting short-term rates to zero has not brought longer rates down, there is a reason for that. Going out there and grabbing the yield curve by the neck and stomping on it is not likely to enhance market confidence in the Fed for doing the right thing," he said.