The Fed’s Asset Purchases
by Dr. Scott Brown, Chief Economist, Raymond James
November 8 – November 12, 2010
As expected, the Federal Open Market Committee has embarked on another round of planned asset purchases. In its November 3 policy statement, the FOMC wrote that it expects to buy another $600 billion in long-term Treasuries by the end of 2Q11 ($75 billion per month), in addition to the $35 billion per month in reinvested principal payments from its portfolio of mortgage-backed securities. There has been much criticism of the move in the financial press. Certainly, there are risks in the Fed’s strategy. However, it’s hardly reckless or ill-advised.
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The Federal Open Market Desk in New York plans to distribute its purchases across the following eight maturity sectors based on the approximate weights below:
| Nominal Coupon Securities by Maturity Range | TIPS | ||||||
|---|---|---|---|---|---|---|---|
| 1½ -2½ Years |
2½-4 Years | 4-5½ Years |
5½-7 Years |
7-10 Years |
10-17 Years |
17-30 Years |
1½-30 Years |
| 5% | 20% | 20% | 23% | 23% | 2% | 4% | 3% |
Why it the Fed expanding its balance sheet? The economy is in a liquidity trap. Short-term nominal interest rates are near 0%. In a liquidity trap, fiscal policy is more effective at boosting growth than monetary policy. However, with fiscal stimulus unavailable, or possibly negative, monetary policy is the only game in town – and it can be effective, not through increasing the money supply, but by altering expectations.
