Fed to pump another $1 trillion into U.S. economy
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WASHINGTON: The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.
Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed's measures in the last year.
The action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply.
The idea was to encourage more economic activity by lowering interest rates, including those on home loans, and to help the financial system as it struggles under the crushing weight of bad loans and poor investments.
Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on long-term Treasury bonds dropped markedly, and analysts predicted that interest rates on fixed-rate mortgages would soon drop below 5 percent.
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But there were also clear indications that the Fed was taking risks that could dilute the value of the dollar and set the stage for future inflation. Gold prices rose $26.60 an ounce, hitting $942, a sign of declining confidence in the dollar. The dollar, which had been losing value in recent weeks to the euro and the yen, dropped sharply again on Wednesday.
In its announcement, the central bank said that the United States remained in a severe recession and listed its continuing woes, from job losses and lost housing wealth to falling exports as a result of the worldwide economic slowdown.
"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability," the central bank said.
As expected, policy makers decided to keep the Fed's benchmark interest rate on overnight loans in a range between zero and 0.25 percent.
But to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying.
In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on all types of loans.
All these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. The central bank also said it would probably expand the scope of a new program to finance consumer and business lending, which gets under way this week.
In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will.
Since last September, the Fed's lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.
Despite a trickle of encouraging data in the last few weeks, Fed officials were clearly still worried and in no mood to cut back on their emergency efforts.
Fed policy makers sharply reduced their economic forecasts in January, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of a drop in consumer prices like those that Japan experienced for nearly a decade.
The Fed rarely buys long-term government bonds. The last occasion was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise.
Ben S. Bernanke, the Fed chairman, has been extremely cautious in recent weeks about predicting an end to the recession, saying that he hoped to see the start of a recovery later this year but warning that unemployment, a lagging indicator, would probably keep climbing until some time in 2010.
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