Fed Intends to Roll Over Holdings as they Mature

The key paragraph in today's statement involves the reinvestment of the principal payments into longer-term Treasuries

. "To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature." They also note that the NY Fed will be out shortly with a technical note providing details on how it will carry out these investments.

The reason that the Fed felt compelled to take this step is in part because "the pace of recovery in output and employment has slowed in recent months." They still say that household spending is increasing, but now only "gradually" and it is still suffering from "high unemployment, modest income growth, lower housing wealth, and tight credit." Business spending, they not is "rising", but that is a slight downgrade from June when they said it had "risen significantly". Housing starts remain at a "depressed level" and bank lending "continued to contract". Although they still see a brighter day down the road they now say "the pace of economic recovery is likely to be more modest in the near term than had been anticipated."

They reiterated the observation that "measures of underlying inflation have trended lower in recent quarters" and they still see it as being "subdued for some time". The paragraph that talks about the funds rate being low for "an extended period" was word for word the same as in previous statements. And again they promise to "employ its policy tools as necessary to promote economic recovery and price stability." And once again Hoenig dissented.

Fed Intends to Roll Over Holdings as they Mature

By: Ronald Russo

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