Fed Will Buy Up to $1.1 Trillion in Treasury Bonds

The Federal Reserve announced Wednesday it will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt.

At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most — if not all — of next year.

Fed purchases should boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt. The last time the Fed set out to influence long-term interest rates was during the 1960s with Operation Twist, conceived by the Kennedy administration.

Across the Atlantic, the Bank of England last week began buying government bonds from financial institutions as it turned to other ways to help revive Britain's moribund economy. The Bank of England, like the Fed, already had lowered its key interest rate to a record low of 0.5 percent.

Finance leaders from top economies have discussed coordinating actions from their governments and central banks to provide a more potent punch against the global financial crisis.

The Fed also said it will buy more mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to help that battered market. The central bank will buy an additional $750 billion, bringing its total purchases of these securities to $1.25 trillion. It also will boost its purchase of Fannie and Freddie debt.

In addition, the Fed said a $1 trillion program to jump-start consumer and small business lending could be expanded to include other financial assets.

The program — which is rolling out this week — currently is focused on spurring lending for autos, education, credit cards and loans for business equipment.  The government already has announced an expansion to include commercial real-estate assets. Any broadening of the program would be beyond that area.

Fed Chairman Ben Bernanke and his colleagues are taking the new steps as the economy sinks deeper into recession.

Since the Fed last meet in late January, "the economy continues to contract," the policymakers observed.

"Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending," they said.

Businesses, meanwhile, are facing weaker sales prospects and credit troubles have them cutting inventories. Problems overseas have crimped demand for U.S. exports, dealing domestic companies another blow, the Fed said.

Copyright AP - Associated Press
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