The U.S. Federal Reserve Board moved towards quantitative easing Wednesday, with the announcement that it would begin buying up U.S. Treasury bills.

As expected, the Fed left its policy rate unchanged in the range of 0-0.25% today, and said that rates would remain low for the foreseeable future. More importantly, it also effectively embarked on a policy of quantitative easing.

“The main question about the outcome of today’s FOMC meeting was whether there would be any shift in the Fed position on the outright purchases of longer-term government Treasuries,” notes RBC Economics. Today the Fed said that it will buy $300 billion worth of Treasuries during the next six months.

“This move indicates that the central bank is pulling out all the stops in trying to turn around the economic downturn by opting for the relatively aggressive quantitative easing on top of various initiatives at credit easing,” RBC says. Although it points out that the Fed is also expanding credit easing, announcing an additional US$750 billion in purchases of agency mortgage-backed securities, and that the purchase of agency debt will increase by US$100 billion to US$200 billion.

“In total, this amounts to an additional $1.15 trillion in monetary stimulus to the U.S. economy, and it marks the official shift in the Fed’s policy towards quantitative easing – even though this was not explicitly stated in the communiqué,” observes TD Economics. “This decision, however, was not a complete surprise to us as we have seen a similar success shift in policy by the Bank of England, and this has been under serious consideration by the Fed for some time.”

The result is a massive expansion of the Fed’s balance sheet. National Bank Financial notes that last August the adjusted monetary base – the sum of money in circulation and bank deposits at the Federal Reserve – stood at $871 billion, six months later it has reached $1.6 trillion and could potentially reach $2.7 trillion by year-end. “That would be serious money printing,” it says. TD adds that in the statement the FOMC noted that “the near-term economic outlook is weak”, and despite the aggressive monetary and fiscal policy expansion over the past year, it expects only a “gradual resumption of sustainable economic growth.”

“In the final analysis, the big news is the willingness of the Fed to veer in the relatively unchartered territory of quantitative easing with a specific focus on buying Treasuries, which to some extent is consistent with the stated goal to “employ all available tools to promote economic recovery and to preserve price stability.” The purpose of engaging in the large-scale purchase of longer-dated Treasuries by the Fed will be to lower their yields on this asset class, which have generally been the benchmark for various borrowing rates in the economy,” TD concludes.

IE