Just call it Uncle Sam investing in Uncle Sam -- or, the taxpayer investing in the taxpayer. In a surprise move, the Fed Wednesday announced a plan to buy $300 billion in long-term U.S. Treasuries as part of an expanded quantitative easing program aimed at jump starting the U.S. economy.
The Fed said it will buy up to an additional $750 billion in mortgaged backed securities and up to $200 billion in government service enterprise debt. The central bank added that it would consider expanding the TALF to include purchases of "other financial assets." The Fed said its decisions were unanimous.
More pessimistic on economy
On the economy, the Fed's tone in its statement was more pessimistic than in its previous statement, released in January. The Fed removed language regarding the timetable for a U.S. economic recovery; in today's statement, it provided no timetable for estimating the recession's bottom.
Regarding interest rates, the Fed also kept the Federal Funds at 0.25 percent, as expected.
During its January meeting, the Fed said it expected a gradual recovery to begin later this year, with Fed Chairman Ben Bernanke later noting that a 10 percent U.S. unemployment rate was certainly possible by the time the recession ended.
Further, given the plethora of bad news in recent months, many economists, indeed many institutional investors, interpreted Bernanke's 10 percent unemployment ceiling as bullish, with some arguing that the ensuing improved sentiment is one of the reasons the stock market has rallied in the past week.
Or, as Energy Trader Jim Dietz told DailyFinance, "A 10 percent unemployment rate is no picnic, but it beats 15 percent unemployment every time."
With the Fed's unprecedented Treasury-purchase decision Wednesday, the Fed is signaling it believes financial and economy conditions remain serious, and are not showing the progress the Fed would like.
Former Fed Governor Laurence Meyer agrees with that evaluation. In comments delivered before the decision, Meyer called the financial crisis "the worst credit crunch since the Great Depression," Bloomberg News reported Wednesday. "The banking system is reeling, credit is being choked off, it is dramatic in size."
Job losses also raise concerns
Indeed, the U.S.'s large job losses over the past four months -- more than 2.4 million Americans have lost their job -- also raise concern of even more dire economic conditions for the nation in the months ahead. Will a second Great Depression, which economists define as a one-year decline in U.S. GDP of 10 percent or more, occur? No economist one can predict that, but it is safe to predict that if the economy continues to lose 500,000 jobs a month, it will be in a Depression.
The Fed's meeting and announcement also occurred days after Fed Chair Bernanke's "60 Minutes" interview on CBS, during which he said he saw "green shoots" in the U.S. economy, as well as modest improvement in the banking sector. Financial markets had stabilized, he said, but credit markets remained constrained, hence necessitating continued quantitative easing and other tactics, such as the TALF, to loosen credit markets.
Economic Analysis: A decisive, accommodative move by the Fed, and one that's needed. These are extraordinary times that require extraordinary measures, and the Fed's commitment to buy Treasuries, if necessary, illustrates the above. After U.S. economic growth resumes, the Fed can begin to reduce the size of its balance sheet and let the private sector work its wonders; but we're quarters away from that stage.
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