Fed Bumps MBS Purchases to $1.25 Trillion

The Federal Reserve's Open Market Committee concluded its monthly meeting on Wednesday afternoon, and announced several aggressive initiatives ""to provide greater support to mortgage lending and housing markets,"" the committee said in a ""statement"":http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm to the press.
The Federal Reserve will purchase an additional $750 billion in ""agency mortgage-backed securities"":http://www.newyorkfed.org/markets/mbs_faq.html (MBS) from Fannie Mae, Freddie Mac, and Ginnie Mae, on top of the $500 billion commitment already made by the central bank. That will bring the Fed's purchases of these securities to a total of $1.25 trillion for the year. To date, the Federal Reserve has bought $217 billion in mortgage securities from the GSEs, and already these purchases have contributed to declining mortgage rates, now hovering around five percent.
The U.S. central bank said it also plans to double its purchases of Fannie and Freddie debt this year, bringing total ""debt purchases"":http://www.newyorkfed.org/markets/gses_faq.html to $200 billion. The Fed has already purchased $47 billion of the previous $100 billion committed to buy agency debt.
In addition, to help improve conditions in private credit markets, the committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.
The Federal Reserve launched the ""Term Asset-Backed Securities Loan Facility"":http://www.federalreserve.gov/newsevents/monetary20081125a1.pdf (TALF) in early March to facilitate the extension of credit to households and small businesses. The committee said on Wednesday it will likely expand the range of eligible collateral for this facility to include other financial assets, such as commercial mortgage-backed securities (CMBS), private-label residential mortgage-backed securities (RMBS), collateralized loan and debt obligations, and securities backed by mortgage-servicer advances.
The committee said that each of these moves is intended to increase the size of the Federal Reserve’s balance sheet. According to Fed Chairman Ben Bernanke, the central bank's balance sheet is shrinking, and his theory is that if you increase the balance sheet, the economy will pick up faster. Currently, the Fed's balance sheet is at $1.90 trillion, down 17 percent from its peak in December of $2.31 trillion.
Since the Fed's policymaking committee last met, it said, factors indicate that the economy is continuing to contract. ""Job losses, declining equity and housing wealth, and tight credit conditions"" have led to cutbacks in consumer spending, inventories, and fixed investment, and ""in these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability,"" the committee said.
Typically, the Fed's committee meetings center on lowering or raising the agency's benchmark interest rate, commonly its most effective tool for influencing economical conditions. However, last December, the central bank slashed its key federal funds rate to near zero. The committee said on Wednesday that it would hold this benchmark at its record-low target range of 0 percent to 0.25 percent, noting that ""economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.""