Feds: 2nd Round to Invigorate The Economy

By: USA Today
By: USA Today

The Federal Reserve is making a bold effort to invigorate the economy by announcing it will buy hundreds of billions more in Treasury bonds.

The Fed says it will buy $600 billion of long-term government bonds by the middle of 2011 to further drive down rates on mortgages and other debt. This will be in addition to an expected $250 billion to $300 billion in purchases over the same period from reinvesting proceeds from its mortgage portfolio.

The idea is for cheaper loans to get people to spend more and stimulate hiring. The Fed says it will review whether adjustments are needed depending on how the economy is performing.

Some worry the Fed action will do little to boost the economy because interest rates are already historically low. Others fear the bond purchases could drive inflation too high over the long term and unleash speculative buying in assets like stocks.

The financial markets, which had priced in the Fed's move for weeks, fluctuated after the annoucement and were up slightly in afternoon trading.

In announcing the action, the Fed said the pace of the economy continues to be slow. Companies remain reluctant to hire, housing activity is depressed and consumers are increasing their spending only gradually.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, dissented for the sixth straight meeting. He says the risks of the Fed's extra stimulus outweigh the potential benefits.

Fed policymakers expressed disappointment that they haven't been able to reduce unemployment — now at 9.6 — and raise inflation to levels more in line with a healthy economy. Progress toward those goals has been disappointingly slow, the Fed acknowledged in its post-meeting statement.

The Fed has tried since the 2008 financial crisis to keep credit available to individuals and businesses. It's done so, in part, by keeping the target range for its bank lending rate near zero.

It also pursued the unorthodox strategy of buying long-term bonds. The Fed's purchases are so vast that they drive up the prices of long-term bonds, which pushes down yields. That, in turn, pulls down rates on mortgages and other loans, spurring consumers to buy homes and cars, and businesses to invest and hire workers.

In 2009, with the nation deep in recession, the Fed aggressively bought $1.7 trillion in mortgage and Treasury bonds. Those purchases helped lower long-term rates on home and corporate loans.

William Dudley, president of the Federal Reserve Bank of New York, estimates that a $500 billion purchase program would provide about as much stimulus as a cut of one-half to three-quarters of a point in the Fed's main interest-rate lever. That's the federal funds rate.

That rate is already at a record low near zero. That's why the Fed is turning to unconventional methods to try to energize the economy.

More than a year after the recession ended, the economy has failed to generate a robust rebound. The economy did grow slightly faster last summer as Americans spent a bit more, the government said Friday.

The Commerce Department said the economy expanded at a 2% annual rate in the July-September quarter, an improvement from the feeble 1.7% growth in the April-June quarter. But it wasn't nearly enough to lower unemployment.

The jobless rate stands at 9.6%. It's been at least 9.5% for 14 months, the longest stretch since the Great Depression.

Bernanke doesn't want to see super-low inflation turn into deflation. That's a widespread drop in prices, wages and the values of homes and stocks.

Deflation can cause people to delay purchases because they feel they can buy later at lower prices. Falling incomes also make it harder to pay debts. Foreclosures rise. So do bankruptcies. Once it takes hold, deflation is hard for policymakers to break. Deflation contributed to Japan's "lost decade" of the 1990s, and the country is still battling it.

"Bernanke knows the lessons of Japan and the Fed's own mistakes in the 1930s," said Randall Kroszner, a former Fed governor. "He doesn't want to repeat them."

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