Fed Will Purchase $600 Billion in Additional Long-Term Treasuries

The Federal Open Market Committee voted to keep the Federal Funds Target in a range between 0 and 25 basis points. The Fed’s language continued a recent trend of more accommodating language. The FOMC for the second straight meeting explicitly stated that inflation is below the normal long term trend:

"Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run… "

"Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. "

With this being the committee’s assessment, the Fed went forward with initiating the much anticipated second round of quantitative easing:

"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. "

The Fed will move to purchase on net an additional $600 billion in long-term treasuries through Q2 2011. This amounts to about $75 billion per month. The FOMC also stated that it will continuously review both the pace and the size of the purchases, leaving open the potential for even further buying going forward.

Thomas Hoenig, as in most recent meetings, voted against this action believing that the risk of additional purchases to future inflation outweighed any benefit.