NEW YORK - The Federal Open Market Committee today held rates and said it will keep constant its holding 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 Fed’s holdings of Treasury securities as they mature.
The Fed held the federal-funds target rate unchanged at zero to 0.25% and reiterated that economic conditions warrant “exceptionally low” interest rates for an “extended period.”
“The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Fed said in its statement.
For the fifth straight meeting, Federal Reserve Bank of Kansas City president Thomas Hoenig was the lone dissenter. Hoenig “judged that the economy is recovering modestly, as projected,” according to the statement. Hoenig also disagreed with today’s decision to keep constant the size of the Fed’s securities holdings.
The discount rate remained at 0.75%, unchanged since February.
The FOMC last changed the federal funds rate in December 2008, when the rate was dropped to the current zero to 0.25% range. The FOMC last raised rates in June 2006.
The reinvestment program will keep constant the value of domestic securities held in the Federal Reserve’s System Open Market Account, which was about $2.054 trillion as of Aug. 4. Principal payments from the Fed’s other holdings, such as its Maiden Lane portfolios, will not be reinvested.
The purchases will concentrate its purchases in the 2- to 10-year maturity range, although purchases will occur across the Treasury and TIPS yield curves.
The Fed expects to publish around the eighth business day of each month the anticipated securities purchases for the month.
The reinvestment policy “will certainly be bullish for the Treasury market” but “the long-lasting effects will be limited,” said Kevin Schultze, managing director at Stone & Youngberg LLC. “What the Fed is doing by purchasing is adding to liquidity in the marketplace. We already have a huge surfeit in liquidity,” he said in an interview.
The stimulus effects “will be pretty muted,” he said.
For the municipal bond market, Schultze said the Fed’s move indicates interest rates “are going to stay low for a really long time.”
“This ultimately will continue allow long municipal spreads to tighten in,” he said.
