The Policy Statement: A Slowdown of Asset Purchases
Until the federal funds rate hit its zero bound, open market operations at the Trading Desk of the Federal Reserve Bank of New York were guided by a target federal funds rate set by the FOMC at its meetings. Since late 2008, however, the Fed has been purchasing a wider scope of assets, and open market operations have been guided by policy directives that specify both the quantity limit and the timing of those purchases. Today, the Fed announced that it would change the timing but not the purchase limits for both mortgage-backed securities and agency debt:
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.
The change was similar to the one made for Treasury securities at the August meeting. While today’s statement reaffirmed the target pace for reaching the $300 billion limit for those purchases (the end of October), it allowed for flexibility in responding to financial and economic conditions with future changes in both the timing and quantity limits.