WASHINGTON — The Federal Reserve announced plans Wednesday to pump hundreds of billions of dollars into the U.S. financial system, an expansive and unconventional new effort to try to get the sputtering U.S. economy on track.
The Fed will, in effect, print money to buy Treasury bonds — an extra $600 billion worth by next June — in a bid to lower long-term interest rates. The action should make it cheaper for Americans to borrow money, take out a mortgage or refinance their house, and for businesses to borrow funds to expand.
Although widely anticipated, the move was bolder than analysts had predicted. Still, some investors had expected the Fed might announce an even more aggressive package of bond purchases, and interest rates rose on financial markets Wednesday after the announcement. In a statement accompanying the decision, the Fed’s policymaking committee emphasized that the action — a step known as “quantitative easing” — was driven by stubbornly high unemployment and ultra-low inflation.
Information on the economy received by Fed members since the last policy- committee meeting in September “confirms that the pace of recovery in output and employment continues to be slow,” the Federal Open Market Committee statement said.
“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate,” the Fed will buy about $75 billion in Treasury bonds a month over the coming eight months.
The statement also made clear that the Fed will keep its options open, potentially extending the purchases if the economy continues to underperform or even reducing them if growth were to spike.
The Fed’s new path has risks.
Inflation could spike at some point, creating bubbles in the stock market or housing prices, or causing the dollar to decline rapidly.
For these reasons, several top Fed officials have expressed resistance to the move, including Thomas Hoenig, president of the Kansas City Fed, who dissented Wednesday.
Key Fed moves
Steps the Federal Reserve has taken to try to drive down interest rates and aid the economy since the financial crisis erupted in 2008:
Dec. 15-16, 2008: Fed creates a target range for interest rates and cuts its key federal funds rate to between zero and 0.25 percent, a record low. Fed vows to use all tools at the central bank’s disposal.
Jan. 27-28, 2009: Fed signals it is prepared to buy longer-term Treasurys and expand other programs.
March 17-18, 2009: Fed announces it will start buying up to $300 billion in government bonds over the next six months and boost purchases of Fannie Mae and Freddie Mac mortgage-backed securities and debt — a total of $1.25 trillion of mortgage securities, an increase of $750 billion. It also says it will buy a total of $200 billion in mortgage debt, an increase of $100 billion.
Sept. 22-23, 2009: Fed slows mortgage-buying program to wrap up purchases by March 31, 2010.
Nov. 3-4, 2009: Fed trims its purchases of mortgage debt to $175 billion because of limited supply, a technical issue.
Aug. 10, 2010: Fed uses a relatively modest amount of money generated from its mortgage portfolio to buy government debt, a move aimed at lowering rates on mortgages and other loans even more.
Oct. 15, 2010: Fed Chairman Ben Bernanke signals the Fed will buy more government bonds.
Wednesday: Fed announces it will buy $600 billion more in Treasury bonds gradually through the middle of 2011.
The Associated Press
