The FOMC clearly crossed over the line into quantitative-easing territory by cutting the fed funds target rate virtually to zero, promising to hold it low for a long period, and committing to large purchases of mortgage-related assets and possibly long-term Treasurys.
In the statement that followed, the FOMC shifted emphasis away from the target rate as the Fed's primary means of implementing monetary easing in favor of aggressively expanding its balance sheet to drive private sector borrowing rates lower. Early clues to its latest thinking were provided late last month upon the launch of its agency and MBS purchase programs and Term Asset-Backed Liquidity Facility (TALF). At that time, it promised to increase the size, the scope and the term of its liquidity facilities as necessary to get credit markets moving again. These comments were echoed in the FOMC statement, which confirms the Fed is prepared do whatever it takes to restore order to the financial system and head off a potentially damaging bout of deflation. The Fed will drive agency and agency-backed MBS yields lower, and will keep Treasurys well bid. If investment-grade corporate bond yields do not fall in the coming months, the Fed could add new facilities to support this market as well.
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