FOMC To Extend Mortgage and Treasury Security Purchases

December 12, 2012 05:41 AM

The Federal Open Market Committee (FOMC) has announced it will extend it purchases of mortgage-backed and Treasury securities to maintain "downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative." The committee said economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. It says unemployment remains elevated and household spending has continued to advance, the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Additionally, it says longer-term inflation expectations have remained stable.

"To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month," explains the FOMC. "The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction."

Link to statement regarding purchases of Treasury securities and agency mortgage-backed securities.

Additionally, it says if the outlook for the labor market does not improve substantially, the FOMC will continue its purchases of Treasury and agency mortgage-backed securities, "and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability." The FOMC says in determining the size, pace, and composition of its asset purchases, it will, "as always, take appropriate account of the likely efficacy and costs of such purchases."

The committee also says strains in global financial markets continue to pose significant downside risks to the economic outlook. "The committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective," it says.

The committee decided to keep the target range for the federal funds rate at 0 to 1/4%, but set some parameters. It says this "exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored." It says it views these thresholds as consistent with its earlier date-based guidance.


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