The Treasury rally continued in spectacular fashion in conjunction with the ZIRP Arrival: Fed Targets Interest Rates 0 to 1/4 Percent.



From the FOMC Press Release.



The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.

Free Money

Treasury Yields

Quantitative Easing American Style

The Federal Reserve opened a new era in U.S. monetary history, cutting interest rates to as low as zero and pledging to buy unlimited quantities of securities, after conventional policies failed to arrest what may be the worst recession since World War II.



The new strategy is likely to involve unusually close cooperation with the Treasury of President-elect Barack Obama, which is still formulating its economic-rescue plans. The aim is to kick-start borrowing and spending to propel the economy toward a recovery by the middle of next year.



“It’s going to take a combination of fiscal and monetary stimulus to get the job done,” said former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co. in Washington. The central bank has signaled it will “make sure that the fiscal stimulus package, which is going to be a big one, is fully supported” and “in effect financed by the Fed.”



“We are running out of the traditional ammunition that is used in a recession,” Obama said at a news conference yesterday. While the Fed is going to have “more tools available to it, it is critical that the other branches of government step up,” he said.



“The only meaningful limitation right now is their capacity to be creative,” said David Resler, chief economist at Nomura Securities International Inc., New York. “The Fed is telling us there is just about nothing off the table.”



“The availability of Fed credit might deter private credit,” said Vincent Reinhart, resident scholar at the American Enterprise Institute in Washington and former director of the Division of Monetary Affairs at the Fed Board. “The lender of last resort becomes the lender of only resort.”



“Quantitative easing American style is what they’re giving us,” said Allen Sinai, chief global economist at Decision Economics Inc., New York. “The Japanese style was to buy government maturities. The U.S. style is directly buying agency securities, buying mortgage-backed securities and lending money right into the private sector.”