Saying Recovery Has Slowed, Fed to Buy U.S. Debt - NYTimes.com

Shows what I know!

This morning I posted a note saying that I thought interest rates could move higher, albeit for a relatively short period of time. Then, this afternoon, Mr. Bernanke and most of the Fed Reserve board decided to use some of the funds that the Fed has received from its portfolio of mortgage-backed securities to buy a relatively small amount of U.S. Treasury debt to try to boast the flagging economic recovery:

The Fed’s new stance marked the completion of a turnabout from a few months ago, when officials were discussing when and how to eventually raise interest rates and gradually shrink the $2.3 trillion balance sheet the Fed amassed through its response to the 2008 financial crisis.

In buying new Treasury securities to the tune of about $10 billion a month — a small fraction of the roughly $700 billion in Treasury debt sitting on the Fed’s balance sheet — the Fed will not let the balance sheet shrink for the time being.

More than anything, the announcement was a signal to the markets that the Fed was concerned about the pace of the recovery, and had shifted from its more optimistic assessment earlier this year, that economic growth was sufficiently strong to begin thinking about how to gradually return to normal monetary policy.

As I write this, Treasury bond prices are soaring - the 10 year Treasury now yields 2.75% - the lowest level since March 2009 (when the economy was considerably weaker). 2 year Treasury notes yield just 0.51%

While I'm obviously feeling a little chagrined at my mistimed market call, I am more interested in what the Fed must be seeing in the data.

I'm also not sure what this move accomplishes. Mortgage rates already stand at multi-decade lows, but housing is still sluggish at best. Corporations have been actively raising money - but then simply hoarding the cash.

My suspicion is that the move is largely a compromise within the Fed to try to accommodate those politicians and a Fed governor that are worried about inflation (recall that one of the nominees for an empty Fed post - MIT economist Peter Diamond - has met serious resistance to his nomination because he said he wasn't worried about inflation).

Saying Recovery Has Slowed, Fed to Buy U.S. Debt - NYTimes.com