Federal Reserve: Fed Announces More Stimulus Despite Growing Criticism: The Federal Reserve on Wednesday dialed up its aid to the beleaguered U.S. economy, launching an effort to put more downward pressure on long-term interest rates over time and help the battered housing sector. The Fed said it would launch a new $400 billion program that will tilt its $2.85 trillion balance sheet more heavily to longer-term securities by selling shorter-term notes and using those funds to purchase longer-dated Treasuries. It will now also reinvest proceeds from maturing mortgage and agency bonds back into the mortgage market, an acknowledgement of just how weak conditions in the sector have remained.
"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,'' Fed said in its statement. Faced with a lofty 9.1 percent jobless rate, consumer and business confidence sapped by a troubling U.S. credit downgrade, and an escalating sovereign debt crisis in Europe, Fed officials have signaled they would seek to prevent already sluggish U.S. growth from weakening further.
The problem is that such policies work, to the extent that they work, by taking duration and other forms of risk onto the government's balance sheet, leaving the private sector with extra risk-bearing capacity that it can then use to extend loans to risky private borrowers.
But buying a 10 or even a 30-year Treasury bond and selling Treasury bills does not remove all that much risk from the government's balance sheet. Much better--if you have $400 billion to spend--to buy something much riskier...