Instant view: Fed to buy Treasuries with maturing debt

NEW YORK (Reuters) - The Federal Reserve on Tuesday said it would begin funneling proceeds from its maturing mortgage bonds into longer-term government debt in an effort to support a sputtering economic recovery.

KEY POINTS: * The Fed, which left benchmark overnight interest rates steady in a zero to 0.25 percent range, also renewed its pledge to keep them low for an extended period, as widely expected. * The decision to reinvest mortgage bond proceeds, an effort to keep market-set borrowing costs down, represents a significant policy shift for a central bank that just a few months ago had been avidly debating an exit strategy from the extraordinary stimulus delivered during the financial crisis.

COMMENTS:

MARC CHANDLER, GLOBAL HEAD OF CURRENCY STRATEGY, BROWN BROTHERS HARRIMAN, NEW YORK:

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

WILLIAM LARKIN, FIXED INCOME PORTFOLIO MANAGER, CABOT MONEY MANAGEMENT, SALEM, MASSACHUSETTS:

"It is a surprise to me that they are going to reinvest maturities back into the Treasury market. It seems a little extreme. Interest rates are already ridiculously low. The problem with a recovery is that you have to have patience, and the market doesn't have enough patience. It is sort of like if you are in a car accident and you break both legs, I don't expect you to run. You need to take time. Finance, as it goes through the system, is slow. Maybe it is the politics, because we have the November elections coming it may be putting some heat under the burner.

"The way I'm looking at it is the duration risk is being removed, so you don't have any risk that the Fed is going to get in the way and try to slow things down any time soon. So that means you can buy anywhere (along the Treasury curve) that you want, which means that the longer end is more attractive because there are higher yields. Also, it looks like the Fed is going to do anything to keep the game going, so there is a big push here. Are they basically using a lot of medicine? There is no question about it, this is a lot of medicine."

BURT WHITE, MANAGING DIRECTOR AND CHIEF INVESTMENT OFFICER, LPL FINANCIAL, BOSTON

"Given the Fed's downgraded economy, I think they felt the need to put in a backstop by reinvesting matured debt into treasury securities.

"They didn't mention the d-word (deflation), and I think that was important. They did downplay modestly their inflation views and reiterated it's not a problem, but they didn't say the d-word, which the market was looking for.

"The actual effect of what they're doing will be less powerful than the symbolic effect, given the fact what this is telling the market is we're going to do everything and anything we can to make sure we've put a backstop on any possible risk of a double dip. This is exactly what the market was hoping for."

STEPHEN MASSOCCA, MANAGING DIRECTOR, WEDBUSH MORGAN, SAN FRANCISCO:

"I don't think it could be a huge surprise to anyone...It does suggest even the more hawkish members of the Fed understand the severity of the issue and are willing to train their guns on the problem if it does get worse. They continue to say to the extent there are issues, we're going to provide liquidity, and you have to look at that as bullish. Helicopter Ben (Bernanke) will be cleared for lift-off if things get worse, so that's clearly good news."

THOMAS DI GALOMA, HEAD OF FIXED-INCOME RATES TRADING, GUGGENHEIM SECURITIES, NEW YORK:

"The Fed assessed the economy as rather weak. They are very nervous about the lack of turnaround in demand. I believe it's only a matter of time before the Fed aggressively pursues long-term asset purchases."

BRIAN DOLAN, CHIEF STRATEGIST, FOREX.COM, BEDMINSTER, NEW JERSEY:

"Obviously they downgraded the economic outlook and said that the recovery is going to be more modest than expected. That's a problem for the dollar in general. The other move was that they're going to reinvest maturing debt proceeds into Treasuries and that has temporarily seen Treasuries rally and U.S. yields drop. That's what hurt the dollar. Ultimately, though, I don't think this is going to be sustained. The bond market had priced in expectations that they might re-initiate asset buying and they did not do that. So ultimately, I expect to see U.S. rates move higher from here and that would see the dollar come bouncing back."

BOB WALTERS, CHIEF ECONOMIST, QUICKEN LOANS, DETROIT, MICHIGAN:

"The economic outlook has weakened since the last Fed meeting, and unemployment remains a concern that the Fed is watching closely. It is clear that the Fed will not present any formal changes in response to the downshift in economic growth until November. The Fed is going to reinvest the principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities; this should have the effect of keeping longer-term interest rates like 30-year fixed mortgage rates low."

CAM ALBRIGHT, SENIOR FIXED INCOME PORTFOLIO MANAGER, WILMINGTON TRUST INVESTMENT MANAGEMENT, WILMINGTON, DELAWARE:

"They have taken a baby step in deciding to reinvest (principal payments) from the portfolio of securities they already have. They are basically keeping their balance sheet pretty consistent in size. Had they allowed these things to roll off it would have been effectively a slight tightening of policy. This is trying to keep policy basically the same."

"The Fed seem to be acknowledging that the economy has certainly lost a lot of momentum over the past several months."

"So far we are seeing a bullish flattening of the Treasury yield curve."

MICHAEL O'ROURKE, CHIEF MARKET STRATEGIST AT BTIG LLC IN NEW YORK:

"I felt like the Fed went to the middle of the road here. This is what had been telegraphed, and I think it's something of a half-measure. If the Fed is seeing weakness, I'd prefer it be more aggressive. So, the market may like this, it may not. The Fed is kind of caught in a spot where it isn't sure what to do, so it went halfway. This is an insurance move, one it probably took grudgingly just to meet market expectations. That usually doesn't work out well. It sends a bad message to the market, though in the short term it should like it. In the longer term, we're going to be dependent on economic data and how good that is to see how the market likes this."

JOHN DOYLE, SENIOR CURRENCY STRATEGIST, TEMPUS CONSULTING, WASHINGTON:

"The dollar sold off considerably right after the announcement, but I wouldn't be surprised to see it bounce a bit later in the session. There's no additional QE and everything else the Fed has said was in line with expectations."

"The statement does support some risk trades in forex, but we will be stuck in this narrow trading range between 1.30 and 1.32 for some time, maybe through the entire month of August. Bottom line, there's nothing in this announcement that will make euro/dollar break out of that range."

JOSEPH BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS, YARDLEY, PENNSYLVANIA:

"It's rallied the market back because they included the key phrase that they're going to keep their investment portfolio constant. It's a continuation of more quantitative easing in effect, although modest. They're maintaining an extended period of time with exceptionally low rates, without changing their language which leads me to believe that we're talking well into next year.

"The market will take comfort from this but on further reflection I doubt will sustain gains. In order to get all this great easing from the Fed, it's coming to you via the weakness of the American economy. We'll be slipping down toward the lower end of the trading range now, with an S&P toward 950 instead of moving up toward 1,200."

WARD MCCARTHY, CHIEF FINANCIAL ECONOMIST, MANAGING DIRECTOR, FIXED INCOME DIVISION, JEFFERIES & CO:

"We learned the Fed is not as panicked as the market thinks they are, but they also don't want the size of the balance sheet to shrink so they are going to reinvest their proceeds into Treasuries."

GARY THAYER, CHIEF MACROSTRATEGIST, WELLS FARGO ADVISORS, ST. LOUIS, MISSOURI:

"The stock market likes it. It cut some losses. The Fed said it would keep rates low and said it would reinvest proceeds of the maturing assets on their balance sheet. That's a sign they are willing to provide extra liquidity if needed, but it's not a major move, They are maintaining their quantitative easing. They could have let those securities mature and let them run off, but they decided to reinvest the principal payment from those maturities, maintaining the same level of accommodation. They are also going to roll over the holdings of Treasury maturities as they mature. They are not removing accommodation; they are maintaining it."

MARKET REACTION: STOCKS: U.S. stock indexes trim losses BONDS: U.S. Treasury debt prices rise DOLLAR: U.S. dollar falls against the euro and yen