Treasuries Drop as Fed Bond-Purchase Boost Spurs Inflation Bets

The Fed said it will continue to buy bonds. Image: Thinkstock

Treasuries fell after Federal Reserve officials said they’ll expand their third round of so-called quantitative easing with additional asset purchases, renewing concern inflation will accelerate.

Federal Open Market Committee policy makers said after a two-day meeting the central bank will buy 45 billion a month of Treasuries securities starting in January. The Fed said in September it would buy $40 billion a month in mortgage bonds and would continue until the labor market improves substantially. Treasuries pared losses earlier as the U.S. drew stronger-than-forecast demand at a 10-year note sale.

“They’re not going to stop until the economy is well on its way to recovery,” Thomas L. di Galoma, a managing director at Navigate Advisors, a brokerage for institutional investors in Stamford, Connecticut, said before the Fed statement. “We’re going to see inflation down the road.”

Economists in a Bloomberg survey had forecast the central bank would announce $45 billion in monthly Treasury buying. The central bank’s Operation Twist program, designed to lower borrowing rates by replacing $667 billion of short-term debt in its holdings with the same amount of longer-term bonds, expires this month

Policy makers said Sept. 13 the central bank would undertake the open-ended purchases of mortgage debt to boost growth and reduce unemployment. They said the Fed would press on with the purchases until the labor market improves substantially.

Ten-year yields declined 15 basis points from Sept. 12, the day before the mortgage-bond announcement, to Sept. 26.

The Fed has pumped more than $2 trillion into the financial system since its first round of QE in 2008 without unhinging inflation as measured by its preferred gauge, the personal-consumption expenditures index.

The gauge rose 1.7% in October from a year earlier, less than the central bank’s long-run goal of 2%, giving policy makers latitude to further debase the currency and U.S. assets. The broader consumer price index gained 2.2 percent, the Labor Department said Nov. 15.

The Fed also said in its Sept. 13 statement it would probably hold its benchmark interest rate at virtually zero “at least through mid-2015” to support the economy.

While U.S. employers added more jobs than forecast last month, wage growth lagged behind. Payrolls increased by 146,000 jobs in November, beating economists’ estimate of a gain of 86,000, Labor Department data showed on Dec. 7. Average hourly earnings rose 1.7% from a year earlier, data showed, less than half the four-year high of 3.7% in January 2009.

Treasury yields have fallen since the Nov. 6 presidential election as the nation faces a budget-deficit showdown that could push the economy into recession.

If lawmakers can’t reach an agreement, $607 billion in automatic spending cuts and tax increases will start Jan. 1. Going over the fiscal cliff would cause the world’s biggest economy to contract 0.5% next year, according to the Congressional Budget Office.