The Federal Reserve on Wednesday launched a fresh effort to support
a struggling U.S. economy, committing to buy $600 billion in
government bonds despite concerns the program could do more harm
The decision takes the Fed into largely uncharted waters and is
aimed at further lowering borrowing costs for consumers and
businesses still suffering in the aftermath of the worst recession
since the Great Depression.
The U.S. central bank said it would buy about $75 billion in
longer-term Treasury bonds per month through the end of June 2011
and could adjust purchases depending on the recovery.
"The economy is slowly digging itself out of a deep hole," said
Brian Bethune, economist at IHS Global Insight in Lexington,
Massachusetts. "The Fed is making the right moves here to nudge the
pace up a little..."
Critics within and outside the central bank fear the Fed's policy
will lead to high inflation and worry that low interest rates in
the United States risk fueling asset bubbles abroad.
But with the U.S. economy expanding at only a 2.0 percent annual
pace in the third quarter of this year and the jobless rate
seemingly stuck around 9.6 percent, the Fed had come under pressure
to do more to stimulate business activity.
FED WORRIED ABOUT HIGH UNEMPLOYMENT, LOW INFLATION
In the Federal Reserve's post-meeting statement, policymakers
described the economy as "slow" and said employers remained
reluctant to create jobs. They also called inflation "somewhat
"Progress toward (our) objectives has been disappointingly slow,"
the Fed said, referring to its dual mandate to maintain price
stability and foster maximum sustainable employment.
With 14.8 million Americans unemployed, factories operating well
short of capacity, and inflation well below the range the Fed would
prefer, some officials at the central bank see the risk of a
vicious deflationary cycle where consumers hold off on purchases,
choking off economic growth.
The overall size of the bond buying program was slightly larger
than the $500 billion that many analysts had looked for, though the
pace of monthly buying fell short of expectations for something
around $100 billion.
Market reaction was initially volatile but at the end of the day
left the recent uptrend in stocks and downtrend in the U.S. dollar
The Standard & Poor's 500 index of U.S. stocks rose just 0.37
percent after initial losses and the dollar fell against the euro.
U.S. Treasury bond yields fell for shorter-dated maturities.
Disappointment that the Fed did not expand buying to 30-year bonds
led to a sharp rise in long-dated yields.
While doubts lingered about the ability of bond purchases to kick
start a moribund economy, there was a sense in the market that the
Fed was open to doing more if the recovery remains sluggish.
"The (Fed) is still leaning toward the easier side and views the
program as being open-ended," said Ward McCarthy, chief financial
economist at Jefferies in New York.
Nearly 90 percent of the Fed's purchases will be of Treasuries with
maturities ranging from 2-1/2 to 10 years, the New York Fed said,
adding it would temporarily relax a rule limiting ownership by the
Fed of any particular security to 35 percent. It said holdings
would be allowed to rise above that threshold "only in modest
In response to the most severe financial crisis in generations, the
central bank had already cut overnight interest rates to near zero
and bought about $1.7 trillion in U.S. government debt and
Those purchases, however, occurred when financial markets were
largely paralyzed, and economists and Fed officials alike are
divided over how effective the new program will be.
Indeed, Kansas City Fed President Thomas Hoenig and some other Fed
officials worry further bond buying could do more harm than good by
providing tinder for inflation that will ignite when the recovery
finally gains traction. Hoenig voted against the action, his
seventh straight dissent.
The impact of Fed monetary easing overseas has been significant.
With the prospect of a long period of ultra-low returns in the
United States, investors have flocked to emerging markets, pushing
those currencies higher. Developing economies, worried about a loss
of export competitiveness, have cried foul.
"We are all under attack by the relaxed monetary policy of the
United States," Colombian Finance Minister Juan Carlos Echeverry
told investors on Tuesday.
The Bank of Japan, which meets on Thursday and Friday, is also
poised to launch a new round of bond buying. The European Central
Bank and Bank of England also meet this week, but are expected to
leave policy on hold.
The Fed's policies also have repercussions for liquidity in
Treasury bonds, the world's largest sovereign debt market where
investors historically seek safe-haven from market stress.
The U.S. central bank already owns roughly 12.5 percent of all
outstanding Treasury bonds and notes. If it were to buy $1 trillion
more, as some economists expect it eventually will, the portion of
its holdings compared with all outstanding Treasuries could jump to
A group of bond dealers that advises the U.S. Treasury expressed
concerns about the possibility that a shortage of bonds could cause
market disruptions, according to minutes from its November 2
meeting released on Wednesday.
Written by: By Pedro da Costa and Mark Felsenthal