It will reinvest its holdings of mortgage-backed securities
The Federal Reserve on Wednesday said it would sell $400 billion of its shorter-term securities to buy longer-term holdings, its latest effort to boost a weak economy.
The Fed's move to rebalance its $2.87 trillion portfolio could lower Treasury yields further. Ultimately, it might reduce rates on mortgages and other consumer and business loans.
The Fed also said it will reinvest its holdings of mortgage-backed securities, which would help keep mortgage rates at super-low levels. The Fed had previously reinvested the interest and principal into Treasury purchases.
Fed policymakers announced the moves on Wednesday after a two-day meeting. Three members dissented from the decision.
Stocks fell immediately after the announcement. The Dow Jones industrial average dropped 100 points. The yield on the 10-year Treasury note tumbled, and its price rose.
In its statement, the Fed noted that the economy is growing slowley, unemployment is high and housing remains in a prolonged 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.
Many analysts have said the shift in the Fed's portfolio could provide modest help by reducing borrowing costs and perhaps raising stock prices. Others say it won't help and 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.