Month in Cash Update: The Fed surprises

The Federal Reserve’s Federal Open Market Committee came out this week with a pretty aggressive response to the recent downturn in employment numbers and renewed concerns over the recovery by announcing a new round of easing measures, this time focusing on mortgages. The FOMC’s latest statement was full of new phrases, but most significant was the open-ended nature of the commitment—the Fed will now continue stimulus measures until labor market conditions improve.

The FOMC now plans to purchase an additional $40 billion per month in agency mortgage-backed securities (MBS) in an attempt to hold down longer-term rates and keep the promising real estate market, one of the brighter spots of late in the subpar recovery, on an upward path. The Fed will also continue its “Operation Twist” program, first announced in June, under which the Fed purchases longer-term Treasury securities with the proceeds from the sale of short-term Treasuries, and will continue reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS. The Fed announcement also noted that the exceptionally low federal funds rate policy, currently pegged at  0% to 0.25%, will likely be extended at least through mid-2015.