Fed Treasury buys have no lasting impact: Fed study

By Alister Bull

WASHINGTON (Reuters) - Federal Reserve purchases of U.S. Treasuries have not produced a lasting drop in long-term yields, according to a study by the St Louis Federal Reserve, as Fed documents separately showed that the U.S. central bank was considering buying even more bonds.

"The Fed has increased its purchases of longer-term Treasuries and expanded its balance sheet by about $150 billion since March 18. Whatever their immediate effect, these actions appear to have had no permanent effect on the yield curve," according to the study, which was posted on Monday.

"The marked flattening of the yield curve associated with the (Fed's) announcement has vanished. Instead, the yield curve has become more steeply sloped," the study noted. It said it was not possible to single out what was driving up yields.

The Fed shocked markets on March 18 with a $300 billion purchase program of longer dated U.S. Treasury bonds, which quickly reduced longer bond yields by about 50 basis points.

The action was aimed at sheltering the economy from the worst U.S. recession in decades by improving conditions in private credit markets to spur spending and investment.

Since then the yield curve has steepened somewhat, with economists blaming a variety of factors including stepped up issuance of securities by the U.S. Treasury to finance the country's budget deficit, as well as inflation concerns.

Minutes of the policy-setting Federal Open Market Committee's April 28-29 meeting released on Wednesday showed that some Fed officials had argued that a further increase in purchases might be warranted to spur recovery, although the Fed opted to wait and see how the economy evolves before deciding.

The minutes showed that policy-makers felt the securities purchases were aiding the economy by providing financial stimulus. The Fed has promised to massively boost the amount of money in the U.S. economy and is also buying up to $1.45 trillion of agency mortgage backed securities and debt.