The US Federal Reserve said on Wednesday it will buy almost 1.2 trillion US dollars worth of debt to help boost lending and promote economic recovery. The US central bank said it would start buying long-term government debt and expand purchases of mortgage-related debt.
The announcement follows two days of policy meeting when it was decided to leave interest rates unchanged close to zero. In December, the central bank cut rates as low as they can go - to a range of zero to 0.25%.
The size of the move surprised investors, causing the Dow Jones stock index to jump almost 200 points.
The Federal Reserve said it hopes the measures will boost mortgage lending and the struggling housing market by lowering interest rates on mortgages and other forms consumer debt.
“To provide greater support to mortgage lending and housing markets, the Federal Open Monetary Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional 750 billion US dollars of agency mortgage-backed securities, bringing its total purchases of these securities to up to 1.25 trillion this year, and to increase its purchases of agency debt this year by up to 100 billion to a total of up to 200 billion US dollars. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to 300 billion of longer-term Treasury securities over the next six months”.
The Fed said it would employ all available tools to promote economic recovery.
In its release following the meeting the Federal Reserve said it had launched the Term Asset-Backed Securities Loan Facility “to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets”.
The decisions are based on information received by the FOMC which indicates that the US economy continues to contract; job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending plus weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment”. The release also points out that US exports have slumped as a number of major trading partners have also fallen into recession.
However “although the near-term economic outlook is weak, the Committee anticipates 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”.
In the current circumstances inflation seems no longer a major concern: in the light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover “there is some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term”.