Thursday, 19 March 2009

Fed, BoJ step up the easing

The Fed finally made its long-anticipated move on Wednesday. From Bloomberg:

The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.

The announcement following the Federal Open Market Committee meeting today in Washington spurred the biggest rally in longer-dated Treasuries in decades. Officials unanimously voted to expand the Fed’s balance sheet up to $1.15 trillion, and said they may broaden a program aimed at boosting consumer loans to include other assets, today’s statement showed.

With today’s move, the Fed has committed to buy or loan against everything from corporate debt, mortgages and consumer loans to government debt, after cutting its benchmark interest rate to zero failed to end the credit crunch...

The central bank will begin purchases of longer-term Treasuries “late next week” and buy the securities two to three times per week, the New York Fed, which will manage the operation, said in a statement. The transactions will be concentrated in two-year to 10-year debt the statement said; 30- year bonds underperformed 10-year notes as a result.

Somewhat ironically, this announcement came on the same day as a report showing that inflation picked up in February, the consumer price index climbing 0.4 percent after a 0.3 percent rise in January.

The Fed will not be the only central bank stepping up its buying of government debt. The Bank of Japan has committed to do the same. AFP/CNA reports:

Bank of Japan governor Masaaki Shirakawa said it was too soon to say the global financial system was on the mend, despite the recent rally on world stock markets...

The Bank left its key lending rate on hold at 0.1 per cent for a third straight month, as expected.

It also said it would boost its outright purchases of Japanese government bonds by almost 30 per cent to 21.6 trillion yen (219 billion US dollars) a year to keep credit flowing during the economic downturn...

The economy is "likely to continue deteriorating for the time being" and financial markets are expected to "remain under stress" in the foreseeable future, the BoJ warned in a statement.

The BoJ's latest announcement came a day after it said it would lend up to one trillion yen (10 billion US dollars) to commercial banks to cover risky debt.

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