MONEY MATTERS

In an effort to boost a weak economy the Federal Reserve said it will sell its $400 billion shorter-term securities to buy longer –term holdings. This move could further lower the yields of the Treasury and ultimately reduce rates on mortgages and consumer and business loans. The holdings of mortgage backed securities will be reinvested by the Fed and this will help keep mortgage rates lower. Soon after this announcement, made by the Fed, the stocks fell immediately. The Dow Jones industrial average dropped 100 points. The yield on the 10-year Treasury note tumbled, and its price rose. The Fed has said in its statement that the economy is growing slowly, unemployment is still high and the housing sector is still slump. As a result, the Fed has directed the New York Fed to purchase Treasuries with remaining maturities of six to 30 years, and to sell an equal amount of securities with maturities of three years or less. There is a difference in opinion among the analysts on this move of the Fed, a few are of the view that this shift in portfolio could provide modest help by reducing borrowing costs and perhaps raising stock prices. Whereas others warn that the move could escalate inflation. In June, the Fed completed a $600 billion bond-buying programme that may have helped keep rates low.

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