Economists and others weigh in on the Federal Reserves decisions to buy Treasurys and increase purchases of other securities

This is a huge step forward, which we have thought inevitable for some time but did not expect to see in the statement today… The point here is to drive new marginal capital flows out of Treasurys, by making them relatively unattractive, and into riskier assets. We aren’t sure $300 billion is enough, but this is a good start. –Ian Shepherdson, High Frequency Economi The largest benefit may come in the form of lower mortgage rates, which have fallen as a spread to Treasuries this year but remain about unchanged year-to-date in level terms. Mortgage refinancing activity is likely to be quite strong in the coming weeks. –Nomura Global Economics Even with energy prices having flattened The Fed’s Treasury purchases will absorb a very significant portion of the amount of gross issuance that we anticipate to occur over the next six months… The Fed’s announcement signals a clear intent to continue to drive mortgage rates lower and we expect them to meet this objective. This could represent a powerful source of stimulus for the household sector of the economy. In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year. –David Greenlaw, Morgan Stanley Plans to step up purchases of mortgage-backed securities and agency debt are clearly aimed at restoring the housing market. Low mortgage rates have already led to a surge in refinancing activity, without doing much for home sales. It remains to be seen whether the expansion of Fed purchases of mortgage-backed securities will change this, at least until some semblance of stability has been restored to the labor market and consumer confidence begins to improve. Moreover, with the declines in house prices already in the books and the probability that house prices will register further significant declines, the number of current homeowners who will be able to successfully refinance will be pared down accordingly as greater numbers find themselves treading water if not under water. –Richard F. Moody, Forward Capital The Fed will now purchase $1.25 trillion of mortgage-backed securities (up from $500billion) and $200 billion of agency debt (up from $100 billion). By comparison, the $300 billion of Treasuries looks small. But this could just be the opening salvo and the Fed may yet up its purchase of Treasuries if the TALF runs into more problems or if the economic news continues to deteriorate. Overall, no one knows whether these measures will work. Much depends on whether banks loan out the cash they raise from selling Treasuries and whether households and businesses spend, rather than save, any extra borrowing. But the shear size of the measures suggests that they will do some good, thus increasing the chances of a decent recovery next year. At the least, no one can say that the Fed isn’t trying. –Paul Dales, Capital Economics The agency MBS market is close to $4 trillion, so the Fed will end up owning almost one-third of the agency mortgage market. If this was a “rigged market” (to quote one of my learned colleagues on the mortgage desk) before, what should we call it now?! … $50 billion per month in Treasuries pales in comparison to new supply. Just to flesh that point out, we project that auctions of 2’s, 3’s, 5’s, 7’s, and 10’s will total $150 billion in March. In essence, even if all the purchases are limited to 2’s to 10’s, the Fed’s program will merely be a third of the new supply (and far short of one-third of the total market, as is the case for agency MBS). The bottom line is that the on-the-run/off-the-run relationship for Treasuries will move big-time, as the Fed sucks up a portion of the float in off-the-run issues across the coupon curve, while the Treasury issues massive new issues every month. –Stephen Stanley, RBS Greenwich Capital If there’s one aspect of the current environment that still amazes, it’s the fact that nothing amazes anymore. Even today’s announcement that the Federal Reserve plans on purchasing everything in America that isn’t nailed down raised relatively few eyebrows on our end… Effectively, the Fed is monetizing the Treasury’s debt, a strategy that appears in the encyclopedia under the heading “how to trigger inflation.” In any other environment, this monetization would be deeply troubling, but given the lack of end user demand, the prospects for a near term pop in prices is rather remote. The aggressiveness also suggests that the Federal Reserve remains highly concerned about deflation. –Guy LeBas, Janney Montgomery Scott These increases may reflect The Fed has decided to be the central bank that swallowed the Bank of England’s canary! … We are not, however, convinced of the sustainability of the Treasury rally (ten-year yields fell about 50 basis points in response to the news — very similar to the move in the gilt market). However, the scale of the Fed’s proposed purchases of Treasuries (relative to the size of the debt and the deficit) is much smaller than the Bank of England’s purchase (it would have had to be well above $1 trillion to be comparable). In addition, we are not convinced that we are headed for deflation and we worry about the longer-term inflation implications of these purchases. –RDQ Economics The Federal Reserve opened the sluice gates wide, hoping to fill the canyons of finance with liquidity. In an extraordinary step, the FOMC said it would double its purchases of mortgage-backed securities and agency debt from $600 billion to $1.25 trillion. More importantly, the announcement marked the Fed’s formal adoption of a pure quantitative easing policy… Although the notion of quantitative easing has been much discussed in the past few months, the policy clearly took effect today. Many thought it would never come to pass. In many ways this is a tragedy that could have been avoided. But that discussion is better left for another day. What is encouraging is that the diversity of voices and opinions on the FOMC were able to converge on a cogent and comprehensive policy to facilitate the flow of credi –Joseph Brusuelas, Moody’s Economy.com