Fed to buy long-term US govt debt

The Federal Reserve on Wednesday vowed to pump an additional $1 trillion into the economy.

The Federal Reserve on Wednesday vowed to pump an additional $1 trillion into the US economy in an aggressive bid to battle a deep recession,partly by buying government bonds for the first time since the 1960s.

Concluding a two-day policy meeting,the central bank said it would buy up to $300 billion in longer-term Treasuries to bring down borrowing costs,harkening back to a program called “Operation Twist” that ran from 1961 to 1965.

The decision caught many off guard and jolted markets.

While the Fed had said it was considering such a move,it had downplayed it in recent weeks. As recently as March 6,New York Federal Reserve Bank President William Dudley had said buying longer-term government debt was not the most efficient way to ease credit market strains.

The price of US government bonds surged after the announcement,with yields taking their biggest one-day tumble since 1987. Stock prices also shot higher,while the dollar plunged.

“It’s an attempt to keep rates low,particularly on the mortgage side,which is seen as critical to a big revival of the housing market,” said Rick Meckler,president of Libertyview Capital Management in New York.

“I think it fits in well with the overall plan the government has to be more creative about how it can bring mortgages more in line with the movement that’s appeared in Treasury rates,” he said.

In addition to purchasing Treasury debt,the Fed said it would expand an existing program to buy debt and securities issued by mortgage finance agencies by $850 billion to $1.45 trillion,an effort to lower mortgage rates.

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Quicken Loans said rates on 30-year mortgages fell as much as 0.375 percentage point to 5.0 per cent on the announcement.

RATES NEAR ZERO

The Bank of England’s recent success in driving interest rates down by buying government debt may have been a factor in the US central bank’s decision. By driving down yields on benchmark debt,the Fed hopes to lower a wide array of credit costs for consumers and businesses.

“This is a pretty dramatic move … They are trying to bring down all consumer rates,” said James Caron,head of global rates research at Morgan Stanley in New York.

The New York Fed said it would begin buying the Treasury debt late next week and planned to focus on securities with maturities ranging from two years to ten years. It said it would make purchases about two to three times a week.

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In addition to ramping up its efforts to pump money into the recession-struck economy,the Fed unanimously decided to hold its target for overnight interest rates in a zero to 0.25 per cent range — the level reached in December. One Fed official,Richmond Federal Reserve Bank President Jeffrey Lacker,returned to the fold after dissenting in January.