Consistent with expectations, the Fed announced yesterday that it will start outright purchases of long-term Treasuries in 2013, after its current Twist purchases expire at the end of the year. Allowing the Twist purchases to expire without replacing them would have constituted some degree of tightening in our view, and given there is a high probability of fiscal tightening going into next year, avoiding a monetary tightening at the same time is sensible. The Fed will now buy $45bn in long term US Treasuries a month, the same amount that it was buying under the Twist. However, unlike the Twist these will be outright purchases - the Fed will not sell any shorter-term Treasuries to offset them, and they will be financed through the creation of new excess reserves and the expansion of the Fed's balance sheet. These purchases will be in addition to the Fed's ongoing purchases of $40bn in agency MBS per month. In other words, through these purchases the Fed will be injecting new cash into the economy at a rate of about $1 trillion per year. With yesterday's announcement, the Fed has fully shifted from a calendar-based approach, where it announces ahead of time when it plans to end its purchases, to a more flexible and open-ended approach whereby it will change the amount of stimulation it provides as conditions transpire. And it allows the Fed the needed flexibility to push a little harder on the gas or let up as conditions change.
" And it allows the Fed the needed flexibility to push a little harder on the gas..." What if the car stalls or won't start???