The Federal Reserve, after two days of meetings, has emerged with “extensions of and modifications to a number of its liquidity programs,” says the Fed’s press release:
The Board of Governors approved extension through February 1, 2010, of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The expiration date for the Term Asset-Backed Securities Loan Facility (TALF) currently remains set at December 31, 2009. The Term Auction Facility (TAF) does not have a fixed expiration date.
The release also said that the currency swaps between the Fed and other central banks would be extended through February 1, 2010.
These extensions mean that while some improvement in the economy has been seen, the Federal Reserve believes that many areas of the economy will remain stressed for at least the remainder of 2009.
With extensions of liquidity programs, the Fed maintains control of banks that took bailouts… Another topic that’s been in the news, as Chairman Ben Bernanke testified before Congress about the Fed’s role in the Merrill Lynch takeover.
Bloomberg reports, “Legislators are trying to determine whether Bernanke overstepped his authority in pressuring Bank of America to complete the purchase of Merrill.”
Bank of America CEO Kenneth Lewis said that “he decided to proceed with the takeover of Merrill after regulators said they might remove management and because his company’s future was ‘intertwined’ with Merrill’s fate,” said the news service.
As the drama plays out in Congress, the Fed’s Treasury purchases are continuing.
And, according to The Wall Street Journal, the Fed “opted against enlarging its program to buy Treasury bonds to spur growth... It will proceed with previously announced plans to buy up to $300 billion in long-term U.S. Treasury bonds by autumn and up to $1.25 trillion in mortgage-backed securities by year's end.”
In fact, the Fed just bought $3.25 billion in Treasuries today, reports MarketWatch.
These efforts are meant to push Treasury prices higher and yields lower, as yields have a trickle-down effect that can seep into mortgage rates and car loan rates.
At the same time, the Fed is holding interest rates near zero because of stressed areas of the economy.
CNNMoney’s Chris Isidore wrote, “Some Fed watchers have been looking for signs from the central bank about when it may begin to unwind its positions in Treasuries and mortgage-backed securities, a so-called exit strategy from this period of massive stimulus. The Fed did not give any guidance though, saying only that it is monitoring its balance sheet and will make adjustments as warranted.”
But what does this mean to regular investors?
Adam Lass, editor of WaveStrength Options Weekly, says:
In order to finance the skyrocketing national debt, the Treasury Department is printing up additional bonds at a record setting pace. This has got buyers’ (think China here) knickers in a knot, since it lowers the value of the bonds they are already holding. Beyond that, the risk of default is starting to creep up to the point where the rating services are querying our country’s triple-A rating.
“Word coming out of the back door of the FOMC meeting has the Fed ‘doing nothing,’” says Adam.
But the fact that the Fed – after this last round of $300 billion bond buying – will halt its Treasury purchases, shows that inflation worries may be trickling into the minds of the chairman.
Adam says, “It’s a mess, all right, and the market hates a mess. So long as the Fed talks ‘status quo,’ we will too.”
Adam recommends that investors stick to a short-term downside philosophy.
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