.Fed to pump another $1 trillion into U.S. economy
WASHINGTON: Saying that the recession continues to deepen, the U.S. Federal Reserve announced Wednesday that it would pump an extra $1 trillion into the economy by buying mortgage-backed securities and long-term Treasury issues.
"Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," the Fed said, adding that it would "employ all available tools to promote economic recovery and to preserve price stability."
As expected, the Fed kept its benchmark interest rate virtually at zero. But in a surprise, it drastically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.
The Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently 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 loans of all types.
All of these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. Since last September, the central bank has roughly doubled the size of its balance sheet to nearly $2 trillion from $900 billion — even before the action Wednesday — mainly because of its efforts to rescue credit markets.
Despite a trickle of encouraging economic data in the past few weeks, Fed officials have shown no readiness yet to cut back on their unprecedented measures to pump money into the economy.
Fed policy makers sharply reduced their economic forecasts in December, 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 an across-the-board drop in consumer prices akin to what Japan experienced for nearly a decade.
The Fed said Wednesday that the "near-term economic outlook is weak" but that it anticipated "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."
Hours before the Fed announced its decision on Wednesday, the U.S. Labor Department reported that consumer prices climbed 0.4 percent in January, the second consecutive monthly increase. The news provided some relief from deflation worries, but most analysts still expect prices to remain nearly flat for the foreseeable future. In their most recent forecast, Fed policy makers predicted that consumer prices would rise 0.3 percent to 1 percent this year — well below the central bank's unofficial inflation target of nearly 2 percent.
The Federal Reserve reduced its benchmark interest rate to virtually zero in December, declaring that it would keep the rate at that level for "some time" and focusing its additional efforts to revive the economy on a wide range of new lending programs.
As expected, the Fed repeated on Wednesday that it would keep its benchmark rate, the federal funds rate, at zero for "some time." While the central bank had said for some time that it was considering the possibility of buying longer-term Treasury bonds, Fed officials had played down that idea in the past month as they focused their attention instead on more targeted intervention in the credit markets.
In their statement on Wednesday, however, the Fed policy makers offered little explanation for the decision to go ahead with the Treasury purchases after all, saying only that the move was intended to "improve conditions in private credit markets."
Starting last September, the new lending programs — including money for bailouts of individual companies like Citigroup, American International Group and Bank of America — have caused the Fed to print new money at the fastest pace in history. But much of that money has remained dormant, because the economic downturn has made banks reluctant to lend and businesses and consumers either reluctant or unable to borrow.
The Fed and the Treasury are in the process this week of starting a joint venture called the Consumer and Business Lending Initiative in their latest effort to revive the credit markets. The program will start out by offering $200 billion worth of financing for consumer loans, small business loans and some corporate purposes like equipment leasing.
Fed officials have said they hoped to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hoped the program would eventually provide up to $1 trillion in total financing.
IHT
Why not.
"Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," the Fed said, adding that it would "employ all available tools to promote economic recovery and to preserve price stability."
As expected, the Fed kept its benchmark interest rate virtually at zero. But in a surprise, it drastically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.
The Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently 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 loans of all types.
All of these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. Since last September, the central bank has roughly doubled the size of its balance sheet to nearly $2 trillion from $900 billion — even before the action Wednesday — mainly because of its efforts to rescue credit markets.
Despite a trickle of encouraging economic data in the past few weeks, Fed officials have shown no readiness yet to cut back on their unprecedented measures to pump money into the economy.
Fed policy makers sharply reduced their economic forecasts in December, 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 an across-the-board drop in consumer prices akin to what Japan experienced for nearly a decade.
The Fed said Wednesday that the "near-term economic outlook is weak" but that it anticipated "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."
Hours before the Fed announced its decision on Wednesday, the U.S. Labor Department reported that consumer prices climbed 0.4 percent in January, the second consecutive monthly increase. The news provided some relief from deflation worries, but most analysts still expect prices to remain nearly flat for the foreseeable future. In their most recent forecast, Fed policy makers predicted that consumer prices would rise 0.3 percent to 1 percent this year — well below the central bank's unofficial inflation target of nearly 2 percent.
The Federal Reserve reduced its benchmark interest rate to virtually zero in December, declaring that it would keep the rate at that level for "some time" and focusing its additional efforts to revive the economy on a wide range of new lending programs.
As expected, the Fed repeated on Wednesday that it would keep its benchmark rate, the federal funds rate, at zero for "some time." While the central bank had said for some time that it was considering the possibility of buying longer-term Treasury bonds, Fed officials had played down that idea in the past month as they focused their attention instead on more targeted intervention in the credit markets.
In their statement on Wednesday, however, the Fed policy makers offered little explanation for the decision to go ahead with the Treasury purchases after all, saying only that the move was intended to "improve conditions in private credit markets."
Starting last September, the new lending programs — including money for bailouts of individual companies like Citigroup, American International Group and Bank of America — have caused the Fed to print new money at the fastest pace in history. But much of that money has remained dormant, because the economic downturn has made banks reluctant to lend and businesses and consumers either reluctant or unable to borrow.
The Fed and the Treasury are in the process this week of starting a joint venture called the Consumer and Business Lending Initiative in their latest effort to revive the credit markets. The program will start out by offering $200 billion worth of financing for consumer loans, small business loans and some corporate purposes like equipment leasing.
Fed officials have said they hoped to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hoped the program would eventually provide up to $1 trillion in total financing.
IHT
Why not.
posted by madtom at 9:17 PM
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