Fed commits $600 billion to buy more bonds
The Federal Reserve launched a controversial new policy on Wednesday, committing to buy $600 billion more in government bonds by the middle of next year in an attempt to breathe new life into a struggling U.S. economy.
KEY POINTS: * The U.S. central bank said it would buy about $75 billion in longer-term Treasury bonds per month. * The Fed described the economy as "slow", and said employers remained reluctant to add to payrolls. It said measures of inflation were "somewhat low." * "Although the committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow."
DENNIS GARTMAN, PUBLISHER OF THE GARTMAN LETTER, SUFFOLK, VIRGINIA:
"I applauded their transparency, putting a precise number on it and said this is what we are going to do. This is exactly what they should have said. It's ($600 billion) a little larger than I would have thought they are going to do."
"I think it's probably supportive for the commodity markets, generally. I think it's probably supportive for the gold markets, generally. I think it's probably detrimental for the dollar, generally. I am not sure if anything has changed for the longer term."
JON NAJARIAN, CO-FOUNDER OF WEB INFORMATION OPTIONMONSTER.COM, CHICAGO:
"Basically the CBOE Volatility Index was 2 percent higher in the session prior to the FOMC announcement, indicating a nervousness post election. But now it swung the other way and is falling. This indicates to me that traders feel the Fed support under the market remains firm and that we are likely to see higher highs in the stock benchmarks and the dollar-sensitive stocks in the coming weeks."
DAVID ADER, HEAD OF GOVERNMENT BOND STRATEGY, CRT CAPITAL GROUP, STAMFORD, CONNECTICUT:
"This has largely delivered on the market's size expectations with total asset purchases approaching $900 billion by June, which includes the $35 billion per month for balance sheet purposes, but cut back on the relative purchases in tens and longer. The QE part is about $100 billion more than the general consensus and of course leaves action for the second half an open question."
SCOTT BUCHTA, HEAD OF INVESTMENT STRATEGY, BRAVER STERN SECURITIES, CHICAGO:
"The timing was a bit more aggressive than many participants may have anticipated, but overall this announcement was in line with market expectations. Given the large amount of cash already on bank and corporate balance sheets, this inflow of cash may end up being moved out of the country or into alternative assets classes rather than being reinvested directly into the U.S. economy."
"The decision to buy all Treasuries may have a negative impact in the short-run on Agency MBS as some traders may have added bonds with hopes that the Fed would resume their MBS purchase program."
JEOFF HALL, ECONOMIST, IFR MARKETS, BOSTON:
"Most of the same constraints on growth persist, giving the Fed cover to enact the large-scale asset purchase program. QE2 will be smaller than the market had estimated, however, with only $75 bln per month in new purchases through Q2'11, almost 25 percent below the consensus call. Solely on the economy, the changes in the statement to seize upon are that "the measures of underlying inflation are somewhat low", which is a subtle tweak of the balance of risks toward inflation. That may have been the means by which the Fed arranged a smaller program.
The lack of change to the "extended period" phrasing is somewhat surprising given talk of changes to the pledge and that too may feed expectations that QE2 will prove far smaller than markets had priced in. (Tom) Hoenig's dissent is by now perfunctory but we think the Committee conceded to a smaller program in light of more recent data showing positive growth in demand side indicators and inflation measures."
JOSEPH BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS, YARDLEY, PENNSYLVANIA:
"This is what the market had been anticipating to this point. I would point out it's not $800 to $900 billion in new purchases, it's more like $600, with the difference being a reinvestment of principal and interest that's rolling over. So it's not quantitative easing, it's just an ongoing reinvestment of the previously announced plan.
"Taken in its totality, they're basically saying the economy is still too soft, it's not generating new jobs growth, there is a risk of deflation, and therefore they're going to step into the bond market and create conditions where you have artificially induced interest rates. So this is the path we're going to go down, risks be damned.
"The initial reaction by the stock market is muted at best. I think upon further reading the market will be somewhat disappointed because it was not shock and awe, and they'll come back to it in the middle of next year, but, by then, you'll have a reading on how good or bad economy really is.
"In my judgment we're not embarking on a new course of aggressive stimulation to the American economy to meaningfully reduce unemployment or accelerate GDP growth. And with a Republican Congress in place that wants to roll back the budget to 2008, we're actually going to withdraw stimulus from the American economy."
[Source: Reuters, New York, 03Nov10]
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