Markets expect the Fed to announce Wednesday that it will continue buying Treasurys, helping to keep rates low, but the course for near-term interest rates is more likely to be determined by the actions of politicians as “fiscal cliff” talks continue.
The Fed is widely expected to extend its monthly purchases of $45 billion in Treasurys but end the concurrent sale of shorter-duration Treasurys that it has been conducting under Operation Twist. Twist expires at the end of the month, and Fed watchers now expect its asset purchases to be rolled into a quantitative easing (QE) program, which will add assets to the Fed balance sheet, unlike Twist. The Fed is currently buying $40 billion a month in mortgage purchases as part of its QE3 program.
“I think the market expects to see, relatively speaking, little change. Probably the amount they buy will continue at $45 billion, but they’ll probably stop selling securities at the front end,” said David Ader, chief Treasury strategist at CRT Capital.
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