The UK Treasury has already begun to buy up £75bn of Government bonds by printing new Treasury Bills, but the US Fed will use reserves to buy up its assets rather than ‘print’ new money.
The Fed will be buying up $750bn of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year. Moreover the Federal Open Market Committee, led by Fed chairman Ben Bernanke, decided to purchase up to $300bn of longer-term Treasury securities over the next six months.
The Fed decided on the move after monitoring the UK situation with regard to lowering bond yields; long-term US Treasury yields were at a 20-year high, but yesterday plummeted by 0.5 per cent.
The FOMC says: “[We] will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.”
This announcement, alongside profit announcements from CitiGroup, Bank of America and JP Morgan, saw the S&P 500 rally from a 12-year low and rise 2.1 per cent to 794.35, even going as high as 803.04 at one point. The Dow Jones Industrial Average climbed 90.88 points, or 1.2 per cent, to 7,486.58.
“This is a very powerful and aggressive move,” said Bank of New York Mellon Corp chief economist Richard Hoey in an interview with Bloomberg Television. “One of the reasons I’ve been arguing we won’t have a depression is we’ve got a Fed chairman who understands the problem and is going to come with the right diagnosis and the right medicine.”