In its latest effort to boost a weak economy, the Federal Reserve says it will sell $400 billion of its shorter-term securities to buy longer-term holdings. Fed policymakers announced the move today after a two-day meeting. The Fed’s move to rebalance its $2.87 trillion portfolio could lower Treasury yields further. Ultimately, it might also reduce rates on mortgages and other consumer and business loans. Many analysts have speculated the shift in the Fed’s portfolio could provide modest help to the economy by reducing borrowing costs and perhaps raising stock prices. Others say it won’t help and warn that the move could cause inflation to escalate. In June, the Fed completed a $600 billion bond-buying program that may have helped keep rates low. Stocks fell immediately after the announcement today. The yield on the 10-year Treasury note tumbled, and its price rose.
Expectations that the Fed would expand its holdings of long-term securities, along with fears of another recession, have led investors to buy up U.S. Treasurys. Treasury yields have dropped in response. The central bank is under pressure to revive an economy that has limped along for more than two years since the recession officially ended. In the first six months of this year, the economy grew at an annual rate of just 0.7%. The housing market remains depressed. The unemployment rate is 9.1%. In August, the economy didn’t add any jobs, and consumers didn’t increase their spending on retail goods. Most economists foresee growth of less than 2% for the entire year, and place the odds of another recession at about one in three. Read more about the Fed’s move here.
