The Federal Reserve will replace $400 billion of short-term debt in its portfolio with longer- term Treasuries in an effort to further reduce borrowing costs and counter rising risks of a recession.
The central bank will buy bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting.
The Fed left unchanged its pledge to keep the benchmark interest rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.” The central bank has kept the target federal funds rate for overnight interbank loans in a range of zero to 0.25 percent since December 2008.
The risk assets didn't like the news as there was more hope for the Fed to maybe expand its balance sheet. There was quite a sell off in everything from stocks to commodities and foreign currencies. US Dollar and the Treasury Bonds gained substantially.
The survey poll conducted over the last couple of days showed that majority of you thought that FOMC will do some kind of Operation Twist. That was very well signalled prior to the meeting and there was no surprises.
However, asset classes did not perform as majority thought they would. Stocks and commodities declined, while the US Dollar and Treasuries rallied. Quite interestingly, there was only one vote for bonds to rally.
There seems to be a strong division within the Fed ranks as well, as can be seen from the chart above. Bloomberg:
The FOMC vote was 7-3. Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Charles Plosser of the Philadelphia Fed voted against the FOMC decision for a second consecutive meeting. They “did not support additional policy accommodation at this time,” the Fed statement said today.