The Fed is ready to buy longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the Federal Open Market Committee said in a statement today in Washington. Any purchases before the FOMC’s next meeting in March would still need a vote to authorize the action.
Chairman Ben S. Bernanke, by making emergency credit programs rather than rates the focus of policy, is quelling some of the panic in markets while failing to revive growth. Falling home prices, rising unemployment and more than $1 trillion in losses and writedowns at global financial institutions are deepening the longest recession since the 1980s.
Treasury notes declined after the Fed stopped short of announcing it would begin the purchases. The yield on the benchmark 10-year note climbed about 13 basis points to 2.65 percent at 4:30 p.m. in New York. Stocks rose, with the Standard & Poor’s 500 Index increasing 3.4 percent to 874.09 in New York.
The Fed said there is a risk that inflation could fall too low. The committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term,” the statement said.
The central bank also said it’s ready to expand the quantity of its purchases of mortgage-backed securities and agency bonds and lengthen the program as conditions warrant.”
The purchase of Treasuries would extend the Fed strategy of using its balance sheet to reduce borrowing costs. The new program may benefit several types of borrowers, because long-term government bond yields influence interest rates on mortgages, corporate bonds and municipal debt.
The Fed would also be lowering federal financing costs as the government ramps up deficit spending. Treasuries declined 1.6 percent this month, the worst monthly return since April, eroding a 14 percent gain in 2008 that was the most in 13 years, Merrill Lynch & Co. indexes show.
Investors are anticipating a large increase in the supply of debt to help finance President Barack Obama’s fiscal stimulus plan, which administration officials estimate at $825 billion.
The risk is that turning government deficits into money can spur an increase in prices.
The Fed clashed with the Treasury in the 1950s by reasserting its independence as an inflation fighter after helping the government finance the costs of World War II.
The Fed’s assets have grown by $1 trillion over the past year under credit programs ranging from $416 billion in term loans to banks to purchases of $350 billion in commercial paper issued by U.S. corporations. The balance sheet will continue to grow under plans announced by the central bank.
Bernanke, a scholar of the Great Depression, criticized the Fed in December for failing to stop bank failures that inflamed panic in financial markets during the 1930s. The former Princeton University economist views financial stability as a prerequisite for an economic recovery.
The Fed Board has supported bailouts of Bank of America Corp. and Citigroup Inc. by offering a layer of protection against losses on troubled assets. The Federal Deposit Insurance Corp. and U.S. Treasury also back the rescues.