The FED bought What ??
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Temporary reverse repurchase operations, the short-term withdrawal of money from the banking system, are rare. The Fed has only engaged in 16 reverse repos since late 2000, versus 1247 repurchases. This imbalance means that the Fed is almost always augmenting commercial bank reserves by buying securities, allowing the banks to use their larger reserves to expand credit and borrowing. Thus the rate defended by the Fed is lower than the rate at which the commercial banks would be willing to lend each other if the Fed did not exist.
Back to Friday's MBS purchases. Historically, the Fed's open market operations have been confined to US Treasuries. Clauses 3 to 6 of the Guidelines for the Conduct of System Operations in Federal Agency Issues ensured that Federal Reserve operations could not engage in temporary purchases of securities issued by federal agencies like Freddie Mac and Fannie Mae.[2]
In an August 1999 Fed meeting officials temporarily suspended clauses 3 to 6, giving themselves the authority to freely purchase Ginnie Mae鈥? Freddie Mac鈥? and Fannie Mae鈥搃ssued MBS on a provisional basis without hindrance on size and timing. The reason given: it needed full reign to inject money into the banking system in preparation for the year 2000 crisis.[3] The period for which the temporary suspension was to extend was from October 1, 1999 through April 7, 2000.
The year 2000 crisis proved a dud. But rather than removing the temporary suspension on buying MBS, the Fed renewed the suspension in 2000 and 2001 before permanently striking off clauses 3 to 6 in 2002. In recent Fed documents, only clauses 1 and 2 are listed. This storyline may sound familiar to Fed watchers. The Fed was founded in response to the crisis of 1907, and had its ability to increase the money supply dramatically increased during another crisis, the Great Depression, where gold convertibility was suspended.
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