Fed twists more, benefit little, BS risks grow

As widely expected, the FOMC will “continue through the end of the year its program to extend the average maturity of its holdings of securities.” Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 yrs to 30 yrs at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 yrs or less.” The $ amount will be $267b by the end 2012 vs the $400b of what is expiring at month end. The thought of shifting twist to the MBS did not happen but the Fed will continue reinvesting principal payments from its MBS holdings into agency MBS. They also said they are prepared to “take further action as appropriate…” Lacker dissented and wanted to end Twist. Bottom line, from a market perspective, sell on the news as we got what most expected. From an economic standpoint, the operation is irrelevant as the bond market has already lowered rates for them. Negatively, the Fed is tying their own hands by extending the duration of its portfolio, thus making it more interest rate sensitive and subject to losses when they want to exit in the yrs to come by selling Treasuries. I just don’t get the benefit relative to the growing risks they continue to take with their balance sheet and putting aside the daily misallocation of capital that their policy encourages with the artificial cost of money.

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