This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.
The Fed announced the plan on March 18, 2009 to purchase $300 billion of long-dated Treasury securities over a six-month period. As of July 23, 2009, the Fed has bought $219.7 billion or roughly 73% of the plan. There are mixed opinions within the FOMC about raising the amount of purchases under this plan.
“Some participants thought that increases in purchases of Treasury securities might have little or no effect on long-term interest rates unless the increases were very sizable, given the large amount of current and projected supply of Treasury securities. Others were concerned that announcements of substantial additional purchases could add to perceptions that the federal debt was being monetized. While most members did not see large-scale purchases of Treasury securities as likely to be a source of inflation pressures given the weak economic outlook, public concern about monetization could have adverse implications for inflation expectations.”
Inflation expectations, as measured by the difference between 10-year nominal Treasury note yield and the 10-year TIP rate, are well contained at the present (see chart 1), dispelling concerns about rising inflation expectations.
The program to purchases agency debt ($200 billion) and mortgage-backed securities ($1.25 trillion) announced in November 2008 and expanded at a later date has not been fully utilized. As of July 22, $102.7 billion of agency debt and $545 billion of mortgage-backed securities have been purchased, implying that the Fed has yet to purchase a little over 50% of the planned amount.
The Term Asset-Backed Securities Loan Facility is designed to support the working of the asset-backed securities market and help meet the credit needs of households and small businesses. By the week ended July 22, 2009, the Fed has had made available $237.3 billion. The scope of the TALF program is $1 trillion of non-recourse loans. The spread between asset-backed securities and the 10-year Treasury note yield has narrowed significantly following Fed actions to stem the elevated spreads (see chart 2) but has yet to return to levels seen prior to the onset of the crisis in the fall of 2007.
There is sufficient room under the provisions of current programs to provide support for the working of the financial system, and the Fed, as implied in the minutes of the June meeting and Bernanke’s testimony, is currently focused on promoting growth and designing a suitable exit strategy.
Source: Asha Bangalore, Northern Trust Daily, July 24, 2009.
*Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.