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  Fed Actively Twists But Holds Off on QE3
Posted Under: Research Reports
Today the Federal Reserve announced major changes to the composition of its balance sheet as well as major changes to its description of the economy.

From now through the middle of next year, the Fed will sell $400 billion of Treasury securities with maturities of three years or less and purchase $400 billion in Treasury securities with maturities of six years to thirty years.  This is an "active" form of "twisting" the maturities in its balance sheet in an attempt to bring down long-term interest rates.  It is more aggressive than the "passive" alternative in which the Fed would roll some of its maturing short-term Treasury securities into longer-term Treasury debt.  It is unclear at this point whether the Fed will employ the passive approach in addition to the active twist of $400 billion.
 
The Fed also announced that it will cease shifting its portfolio of mortgage backed securities (MBS) and the debt of Fannie Mae and Freddie Mac (GSE debt) into Treasury securities.  Since mid-2010, the Fed has reduced its holdings of these residential mortgage-based assets by about $300 billion, to $1 trillion from $1.3 trillion, buying Treasury securities with the principal as MBS and GSE debt matured.  Now the Fed will use the principal to buy MBS.  The Fed did not provide a date for that process to end.  In other words, going forward and for the foreseeable future the Fed will maintain a stable amount of Treasury securities and a stable amount of mortgage-based assets...
 
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Posted on Wednesday, September 21, 2011 @ 9:13 PM • Post Link Share: 
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