The Federal Reserve announced another round of monetary stimulus on Wednesday. Bloomberg reports:
The Federal Reserve will replace $400 billion of short-term debt in its portfolio with longer- term Treasuries in an effort to further reduce borrowing costs and counter rising risks of a recession.
The central bank will buy bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said...
The central bank said today it will also reinvest maturing housing debt into mortgage-backed securities instead of Treasuries “to help support conditions in mortgage markets.”
Treasury yields fell on Wednesday, but so did stocks. Bloomberg reports:
The Standard & Poor’s 500 Index tumbled the most in a month, losing 2.9 percent to 1,166.76 at the 4 p.m. close in New York and extending a three-day drop to 4.1 percent. Ten-year Treasury yields dropped to a record low and 30-year bond rates slid to the lowest since January 2009, while two-year yields rose. The Dollar Index climbed 1 percent to a seven-month high of 77.802. Lead, nickel and sugar fell more than 3 percent to lead the S&P GSCI Index to a one-month low...
“Markets took note of the Fed’s downward revision of the economic outlook and upgrading of downside financial risks,” Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail. Pimco is the world’s largest bond-fund manager. “While Fed purchases can influence Treasury and mortgage valuations, it is limited in its ability to deliver economic outcomes.”
US investor sentiment was also soured by news of cuts in the credit ratings of Bank of America, Wells Fargo and Citigroup by Moody's Investors Service.
However, markets mostly closed too early to be affected by news that the House of Representatives had unexpectedly defeated a bill that was to fund the federal government past the end of this month.
Earlier on Wednesday, US economic data had been more encouraging, with existing home sales rising 7.7 percent in August.
Elsewhere on Wednesday, Japan reported a huge trade deficit for August after imports jumped 19.2 percent from a year ago. Exports were also up by 2.8 percent, the first year-on-year rise in six months.
Meanwhile, Europe's sovereign debt situation saw another development as Greece adopted yet more austerity measures on Wednesday in its bid to secure aid money from the EU and IMF.
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