FOMC Recap: Now That the Dust Has Settled …

- The big news at Tuesday’s FOMC meeting was a change in the reinvestment policy for the Fed’s portfolio of MBS. "The Fed will begin to reinvest the cash flows associated with principal repayments of MBS and agency debt into Treasuries instead of letting the portfolio run off. We view this decision as a form of double-dip/deflation insurance."
- Decision to buy “longer-term” Treasuries was a surprise. "We had thought that the Fed would focus any buying on short-dated Treasuries, since the program was being advertised as a “symbolic” change without much economic significance. Instead, the Fed appears to want the program to have greater economic significance by buying across a broader maturity spectrum."
- Is the Fed running out of ammunition? "Some investors are skeptical of the impact of the Fed’s policy change. We point them to Bernanke’s 2002 speech on what the Fed can do to prevent deflation, which outlines a number of additional steps that the Fed can take to spur aggregate demand."

JPMorgan US Economics 20100813

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