Wednesday, September 21, 2011
As expected, the Fed announced that it's going to implement operation twist - selling $400 billion worth of short-term securities and buying $400 billion worth of longer-term securities. In addition, the Fed plans to reinvest funds from mortgage-backed securities (MBS) into MBS rather than treasuries. The goal is to reduce long-term interest rates in general and long-term mortgage rates in particular. How much of a difference will it make? Perhaps a little, but not too much. Mortgage rates will probably decline somewhat, but that depends on other factors as well (whether new economic data indicates weakening of the economy, investors seeking safe-haven plays, etc.). In addition, the Fed stated that there are significant downside risks to the economy, which is the primary reason it thought it needed to provide further stimulus. The initial reaction of financial markets was a major decline in stocks and record-low yields on ten-year bonds. In addition, the dollar strengthened against the yen, euro and pound.