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By James Tan | Broker in Elk Grove, CA

Fed will buy more bonds and MBS in 2013, keeping interest rates down

As reported in the Wall Street Journal, the Fed said Wednesday, at the conclusion of its last policy meeting of the year, that it would enter 2013 with a plan to purchase $85 billion a month of mortgage-backed securities and Treasury securities, part of a continuing attempt to drive down long-term interest rates to encourage borrowing, spending and investing.

The whole article can be read here.
The Fed announcement can be read here.

The Fed said it didn't expect to touch short-term rates until it saw the unemployment rate fall to 6.5% or lower, as long as inflation forecasts remain near its 2% target. That would mean, according to the Fed's economic projections, that it would keep short-term rates near zero into 2015.

Under the Fed's plan for 2013, the central bank will purchase $40 billion a month of mortgage-backed securities and $45 billion a month of long-term Treasury securities. That puts it on course to purchase $540 billion worth of Treasury securities if the policy is continued all year and $480 billion worth of mortgage bonds.

The Fed will no longer be selling the short-term Treasurys because its stockpile of these securities has run down. Instead, it will be funding its purchases by adding reserves to the banking system, which essentially means it will be printing money to buy more bonds. The money-printing worries people concerned about inflation, but Fed officials say they can manage the reserves in a way that prevents inflation.

The move to publicly link the decision to start raising interest rates to specific new thresholds for unemployment and inflation was a momentous turn for the Fed. It reflects a view among central bankers that they can affect economic activity today by shaping people's expectations for the future.

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