Well, the Fed decided to pull the trigger on Quantitative Easing (QE) to augment its on-going, and now-expanded, campaign of Credit Easing (CE) --- and the bond market loves it.
US 10yr bonds have rallied 50bps from 3% to 2.5% and long bonds have rallied 44bps to 3.4% --- but the process of price-discovery is on-going here only 15 minutes after the announcement. Traders simply don't know yet where this will settle out.
Canadian bonds have of course rallied as well. 10-year yields have fallen to 2.7% and longs to 3.5%. We'll have to wait and see, probably until April 23, whether active QE programs in Japan, the UK, Switzerland and now the U.S. have any bearing on the Bank of Canada's decision about when to launch their own program.
The Fed statement follows:
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
As dramatic an impact as the Fed has had on the market today with its announcement, the impact is borne of psychology. Ultimately, the Fed's purchase programs are relatively small compared to the size of the total credit markets and money supply. So, while it does go to show that betting against the Fed can be a painful trade, its not yet clear how much buying the Fed will have to do in order to offset the deleveraging going on in the broader economy (total US credit market debt of over $52 trillion). But there's no doubt that the lower yields will help.
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