The U.S. Federal Reserve announced on 16 September it would continue its current mortgage and Treasury purchase programs and keep the federal funds rate on hold until inflation sustainably exceeds its 2% target – all keys to containing interest rates at very low levels. The bond-buying programs began in mid-March as the central bank took unprecedented steps to shore up the most liquid markets and thereafter support subdued economic activity amid the pandemic-driven recession.
To date, the Fed has purchased more than $3 trillion in U.S. Treasuries and $1 trillion in agency mortgage-backed securities (MBS), and Wednesday’s meeting reaffirmed its commitment to continue purchasing $80 billion in U.S. Treasuries and $40 billion in agency MBS (net of reinvestments) per month for the foreseeable future. The Fed and market participants have debated whether it should simply choose one tool or another, and if the time to slow the pace of purchases has arrived. In our view, each of these tools helps the Fed satisfy its dual mandate of price stability and full employment by supporting fiscal policies and moving investors out the risk spectrum (for background on the risk spectrum since the COVID crisis began, read “A Phased Market Recovery as Liquidity
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