The Fed's Bold Measures Are Worth the Risk of Future Problems

by: Zacks Investment Research

by Charles Rotblut

The big news from the Fed today was its intention to buy more debt-related securities.

Specifically, the Fed will purchase up to an additional $750 billion of agency mortgage-backed securities. Furthermore, the Fed will purchase up to $300 billion of longer-term Treasury securities over the next six months.

The announcement was a surprise not only because of the decision to actually buy treasuries, but also because of the sharp increase in the amount of money being spent to buy agency debt. The Fed is more than doubling the size of its purchase programs.

This is a bold move and is specifically designed to push yields down and make credit widely available.

The markets are clearly applauding the move with stocks soaring. Financial stocks, such as Hartford Financial Services (NYSE:HIG) and Huntington Bancshares (NASDAQ:HBAN) added to their intraday gains. Cyclical stocks, like Burlington Northern Santa Fe Corporation (BNI) and Nordstrom Inc. (NYSE:JWN), which had been down before the announcement, are also rebounding.

Still, investors have to wonder what took the Fed so long and what are they seeing that has them moving into near panic mode. Today's announcement will not have an immediate impact on the economy, but it does set the stage for high inflation once the economy recovers. Nonetheless, the risk of not taking bold action now far outweighs the potential problems we'll have to deal with later.

Let's hope today's annoucement moves the economy closer towards a recovery over the next several months.

The vote for today's actions was unanimous.

Read the Fed statement.