WASHINGTON, DC-Worried that the economic recovery has stalled,the Federal Reserve Bank will be stepping up its investment ingovernment debt. The decision was made during a one-day meeting,held on Tuesday, in which Fed officials came to the conclusion thatthe recovery is weaker than it had anticipated during its lastmeeting in June. It will use the interest it is earning fromexpiring mortgage-backed securities to buy Treasuries that arematuring in the next two to 10 years.

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Last year and in the beginning of 2010, the Federal Reservebrought considerable firepower to the market, buying $1.25 trillionin mortgage securities, $175 billion in mortgage debt from the GSEsand $300 billion in government debt.

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Treasury prices, not surprisingly, rallied after the FederalReserve made its announcement--particularly those withfive-to-seven-year maturity dates. The tactic is also expected toput some downward pressure on mortgage and corporate debtrates.

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Also, interest rates dropped slightly after the Fed’sannouncement, and it looks like a safe bet that interest rates willremain low for some time," says Dennis Sughrue, commercial realestate partner at New York City law firm Herrick, Feinstein. Forhis commercial real estate clients--companies looking to buycommercial property here and in Latin America--Sughrue says thenews is "a mild positive. But it’s important to look at the biggerpicture and realize that commercial real estate borrowers haven’tbeen stymied recently by high interest rates," he tellsGlobeSt.com. "It has been the relatively unavailability offinancing at nearly any price that has slowed development activityand the sales-investment market.”

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On a list of 10 issues facing borrowers, he says that “interestrates might be number 10 or even number 11. So while the Fed’sannouncement was a welcome one, it’s hardly a panacea or somebig-picture action that will, by itself, spur a large increase insales-investment and development activity."

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Of course, a borrower whose loan is based on Libor might notagree, says Kieran Quinn, vice chairman of Walker & Dunlop."We, as an industry, are living on oxygen support and Band-Aidsright now, and the biggest Band-Aid is the low interest rates," hetells GlobeSt.com. A borrower with a loan based on Libor "ispraying every day that the interest rate doesn’t move."

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.