The Feds bold $1.2 trillion plan

March 19, 2009
Matt Isleib

 

 

The Federal Reserve wrapped up its 2 day meeting yesterday and it was highly anticipated for them to leave interest rates untouched. And as anticipated they left key short-term bank rates at all time lows between 0.00-.250 percent. The shocker and what was not intended was the Federal Reserves massive infusion of capital. They announced yesterday a massive $ 1.2 trillion of pledged money to help push mortgage and consumer interest rates lower.

 

 

The plan is for the Fed to start purchasing long term Treasury debt to the tune of up to $300 billion. The news sparked a massive rally in the 10 year Treasury note. The yield on the 10 Year Treasury plummeted from 3.01 to finish the session at 2.53 that was the biggest one-day drop in 25 years. The ten year Treasury not as well as the (MBS) Mortgage Backed Securities are how mortgage rates are derived.

 

 

The second aspect of the massive capital injection is for the Fed to purchase up to $ 750 billion in mortgage backed securities guaranteed by both Fannie Mae and Freddie Mac. The Fed already has in place a commitment that they have been executing on to buy $ 500 billion in mortgage-backed securities bringing the total commitment to $1.2 trillion. The Fed also said it would purchase up to $ 200 Billion of both Fannie and Freddie debt

 

 

This announcement clearly shows that the Fed is willing to take all means necessary to head off what is arguably the worst financial and economic meltdown in this country since the Great Depression. These steps are clearly being put in place to help spur and induce lending as well as push consumer rates lower. It seems that the Fed may very well succeed.

Here is an Intra-Day chart of the 10 Year Treasury Bond: