The Fed To Buy Treasuries Again Soon

Oct 13, 2010 (www.bankrate.com)

This week, it became clear the Federal Reserve is inclined to pour more cash into the economy in an effort to make interest rates go down and prices go up. The Fed would accomplish this by starting another round of quantitative easing -- a fancy term for buying Treasury notes. By paying for billions of dollars' worth of Treasuries, the Fed would add billions of dollars to the money supply. In theory, this would cause a drop in interest rates, including mortgage rates.

The Fed could begin its next round of quantitative easing as soon as early November, after its next scheduled rate policy meeting Nov. 2-3. Quantitative easing isn't a sure thing, but members of the rate-setting Federal Open Market Committee meeting have already discussed how they would go about it.

That discussion was described in the minutes of the Sept. 21 rate policy meeting, released this week. There was some disagreement over the trigger for quantitative easing -- whether the Fed should act if the jobs picture doesn't get better or if it should wait until unemployment gets worse. Although the Fed members didn't agree on whether more monetary stimulus is necessary yet, they did agree on how they would do it -- according to the minutes, they would buy long-term Treasuries.

They also discussed "purchasing additional long-term assets." Last year and early this year, that meant buying mortgage-backed securities. That's what it would mean this time, too. The Fed's minutes say some participants noted "that the economic benefits could be small in current circumstances" -- an indication they don't believe mortgage rates have much room to move lower.