Experts: Fed may take more action
Fed’s investment portfolio; it just reshuffled the holdings. But the Fed has run out of short-term securities to sell. So to maintain its pace of longterm Treasury purchases and keep long-term rates low, it must spend more and increase its portfolio.
The new bond purchase plan would join a program announced in September. Under that program, the Fed is buying $40 billion a month in mortgage bonds to try to force already record-low home-loan rates lower to encourage home buying. The total Fed bond purchases from the two programs would remain $85 billion.
“The Fed really has only one key decision at the meeting, and that is how much of the current program will they replace,” said David Jones, chief economist at DMJ Advisors.
If, on the other hand, the Fed chooses not to replace Twist with a new bond-buying program, the value of its long-term Treasury purchases will decline by half. Long-term borrowing rates might rise as a result.
When the Fed pumps more money into the financial system and adds to its portfolio, it’s called quantitative easing, or QE. Critics argue that QE risks escalating inflation later. The Fed’s portfolio totals nearly $2.9 trillion — more than three times its size before the 2008 financial crisis.
The Fed has launched three rounds of QE since the financial crisis hit. In announcing QE3 in September, the Fed said it would buy mortgage bonds until the job