Fed adds 1.15 trillion dollars to economic fight

March 19, 2009
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, WASHINGTON, March 19 – The Federal Reserve ramped up its battle against the economic crisis Wednesday, announcing plans to pump another 1.15 trillion dollars into the financial system in a stepped-up effort to spark recovery.

The Fed managed to surprise financial markets at the conclusion of a two-day policy meeting, saying it would buy up to 300 billion dollars in long-term US Treasury bonds over the next six months "to help improve conditions in private credit markets."

The central bank also said it would boost purchases of mortgage-backed securities by 750 billion dollars to bring its total to 1.25 trillion dollars this year, and buy 100 billion dollars more in other federal agency debt, as part of a wide-ranging effort to revive the sagging US economy.

Although the Fed did not use the terminology, the actions on a unanimous FOMC vote follow the Bank of England\’s announcement to buy up bonds in a strategy known as "quantitative easing" to get more money circulating and bring down a wide range of borrowing costs.

"They sure came out with both guns blazing," economist Julia Coronado at Barclays Capital said of the Fed\’s 1.15-trillion-dollar initiative.

"I think (Fed members) have concluded they cannot wait around for the Treasury and Congress to solve the problems and need to be more aggressive in getting financial markets moving."

Coronado said the initiative would likely have "a huge impact" on the economy by bringing down many lending rates that the central bank cannot directly control.

She noted that Treasury bond yields showed an immediate drop after the announcement, and that this would translate into lower rates for home, consumer and business loans.

Cary Leahey, senior economist at Decision Economics, said that after two meetings in which the Fed disappointed market participants expecting such a move, chairman Ben Bernanke "delivered in size."

"Mr. Bernanke is saying he is not willing to be responsible for the biggest downturn since the 1930s," Leahey said. "He doesn\’t want that on his tombstone."

For financial markets, Leahey said the move is bullish "since the Fed is willing to pull out the stops and buy anything and everything."

Financial markets gyrated after the news as stocks and bonds surged, while the US dollar fell sharply. Wall Street\’s broad market index rose more than two percent.

"No one expected Bernanke to jump the gun and start buying US Treasuries, but that is exactly what he announced today," said Kathy Lien at Global Forex Trading.

"This action puts them one step ahead of the market, which is exactly where they need to be if they want to gain control of market expectations. "

The announcement was made at the end of a two-day meeting by the Federal Open Market Committee, which kept its base lending rate at a historically low range of zero to 0.25 percent, where it has been since mid-December.

The Fed, which had been expected to keep its federal funds rate unchanged, said it "anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

The panel said that since its last meeting in January, data "indicates that the economy continues to contract" amid a deep recession that is gripping the entire world.

The statement, echoing recent comments by Bernanke, suggested however that a recovery is in sight.

"Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth," the statement said.

Leahy said the statement was unusually glum: "You could spin it as a sign they are really scared, but I think conditions are better than they were six weeks ago."

The US central bank will effectively be printing massive amounts of money for these purchases to help foster recovery in the recession-mired economy, which shrank at a 6.2 percent pace in the last quarter of 2008.

With the traditional tool of interest rate policy now exhausted, the central bank is focused on extraordinary efforts to pump up credit to boost the economy.

It has already started buying up mortgage securities and corporate commercial paper, and is set to launch a new program to pump 200 billion dollars into consumer credit through the purchase of securities linked to auto, student and other types of loans.

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