From the Fed:
For release at 8:15 a.m. EST
The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.
Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participants.
(NB: the above not to be confused with the announcement of the TALF, an entirely seperate multi-billion consumer ABS liquidity program provided by the Fed with TARP backing, also announced today).
And so it begins. Bernanke’s Fed is buying — not just borrowing — mortgage securities. In a huge way too - $500bn in MBS and $100bn in GSE obligations.
The question being: who needed the TARP bailout package, when the Fed could have just done this all along? (Inferred answer: it was a political sop, now that the climate on capital hill has changed, bailouts are de rigueur)
Immediate effect: expect a rally on the ABX.
The Fed is pushing further and further towards a Bank of Japan-like quantitative easing strategy. Purchasing, directly, troubled assets being yet another plank of the BoJ’s plan that Bernanke is replicating.
Financing implications are not yet clear. Either this will result in even more Treasury issuance or, more likely, it will be funded from the Fed’s increased balance sheet without sterilisation, meaning more imbalance in the monetary supply.
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