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Wednesday, September 21, 2011

Fed Twist - US Federal Reserve Twist Statement Explained

Today the US Federal Reserve Open Market Committee (FOMC) met then issued a Press Release explaining what many on TV call the new "Fed Twist Policy." In a nutshell, the FOMC will sell short term US Treasuries to generate funds to buy longer term US Treasuries. They explain it in paragraph three of today's press release.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The FOMC will also support the housing market:
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The FOMC also voted to keep interest rates between 0 to 1/4 percent and said they anticipate "exceptionally low levels for the federal funds rate at least through mid-2013." The decisions today were not unanimous. Eight members of the FOMC voted for this action and three opposed it.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.
best regards
Kirk Lindstrom
Editor of "Kirk Lindstrom's Investment Letter"

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