FOMC Recycles MBS into Treasuries, Dollar Hit

The FOMC voted to reinvest the maturing Agency and MBS securities into Treasuries, which is the type of asset purchases that some had been looking for. We had thought the Fed would refrain, but did not see it as having a major impact on yields or the economy. The dollar saw its earlier gains pared and the stock market recouped some of its earlier losses. The US Treasury market rallied in response.

The Fed did lower its assessment of the economy as widely expected. The Fed recognizes that the economic recovery is likely to be more modest in the near-term than it had anticipated. It continues to anticipate subdued inflation "for some time". Meanwhile Hoenig continued his dissent and objected to the policy action on grounds that the economy was recovering modestly, as the Fed had previously anticipated.

In general the recycling of the Agency and MBS is the most important aspect of today's statement. It gives the statement a more dovish cast than the parsing of the words would.