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‘Very Unusual’ Fed action fails to boost animal spirits: Dow drops 285

This article was posted on Sep 22, 2011 and is filed under Market News

The Fed’s latest moves to bring down long-term interest rates will be “marginally helpful,” predicts former Fed Governor Mark Olson, now co-chair of Treliant Risk Advisors, a compliance and strategic advisory firm specializing in the financial services industry. “There really isn’t a lot of room” left for the Fed to bring down rates.

Specifically, the Fed announced plans to buy $400 billion of long-term Treasuries and sell an equivalent amount by the end of June 2012. The so-called Operation Twist will not change the size of the Fed’s balance sheet but the duration of its Treasury holdings. “This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC statement declares.

In addition, the Fed announced plans to reinvest principal payments from its current holdings of agency debt and agency mortgage-backed securities into agency MBS. In other words, the Fed is going to be buying paper from Fannie Mae and Freddie Mac again “to help support conditions in mortgage markets.”

Treasury prices did rally in response to the Fed announcement with the yield on the benchmark 10-year note falling to a record low 1.86%, while the yield on the 30-year bond slipped to 3.01%. For more visit: Yahoo Finance

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