Reply #8: Fed Reverses Exit Plan With $2 Trillion Holding Floor (Update1)

[ozymandius]

Aug. 11 (Bloomberg) -- The Federal Reserve reversed plans to exit from aggressive monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated.

Central bankers meeting yesterday adopted a $2.05 trillion floor for their securities portfolio, pivoting toward a quantitative target for monetary policy. Treasuries surged and stocks pared losses as some investors judged the decision opened the door to a resumption of large-scale asset purchases.

Officials directed the New York Fed’s trading desk to reinvest what economists estimate will be $15 billion to $20 billion a month in maturing agency and mortgage-backed securities back into U.S. Treasuries. The purchases will help keep Treasury yields and mortgage costs low and prevent the level of monetary stimulus from shrinking further.

Yields on U.S. 10-year notes yesterday dropped to an 18- month low and closed at 2.76 percent in late New York trading, down 7 basis points. A basis point is 0.01 percentage point.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aWemm9SmF89E&pos=3

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Now, here's the thing: If the Fed is going to make any money (or just break even) off this plan to buy securities then you need the private sector to act in concert. When someone re-fis their home to take advantage of the lower rate, then the Fed makes a little money off the deal when the security holding moves from their hands into the private entity. But banks have restrictive lending policies these days. So where will there be a natural market for the Fed's holdings established to be a floor of $2 Trillion?