WORLD> America
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WORLD> America
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Fed launches bold $1.2T effort to revive economy
(Agencies)
Updated: 2009-03-19 08:00 The Fed's decision to buy an additional $750 billion in mortgage-backed securities guaranteed by Fannie and Freddie comes on top of $500 billion in such securities it's already buying. It also will double its purchases of Fannie and Freddie debt to $200 billion.
"This is not only going to keep mortgage rates low for a long period of time," said Greg McBride, a senior financial analyst at Bankrate.com. "The mere announcement may produce a honeymoon effect and bring mortgage rates down to even lower levels in the coming days." The goal behind all the Fed's moves is to spur lending. More lending would boost spending by consumers and businesses, which would revive the economy. The Fed also said it would consider expanding another $1 trillion program that's being rolled out this week. That program aims to boost the availability of consumer loans for autos, education and credit cards, as well as for small businesses. Where does the Fed get all the money? It prints it. The Fed's series of radical programs to lend or buy debt has swollen its balance sheet to nearly $2 trillion -- from just under $900 billion in September. Sohn believes the Fed's balance sheet could grow to $5 trillion over the next two years. The Fed has said it's mindful of the risks of pumping more money into the economy, bailing out financial institutions and leaving a key rate near zero for too long. There's the potential to plant the seeds for higher inflation, put ever-more taxpayer money at risk and encourage "moral hazard." That's when companies make high-stakes gambles knowing the government stands ready to rescue them. Across the Atlantic, the Bank of England last week began buying government bonds from financial institutions as it turned to new 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 is taking the new steps as the US economy sinks deeper into recession. Businesses are facing weaker sales prospects as customers in the United States and abroad cut back, the policymakers said. Still, the Fed said it hoped its actions, the government's bank rescue effort and President Barack Obama's $787 billion stimulus of increased government spending and tax cuts eventually will help revive the economy. "Although the near-term economic outlook is weak, the committee anticipates that policy actions .... will contribute to a gradual resumption of sustainable economic growth," the Fed said. But even in this best-case scenario, the nation's unemployment rate -- now at quarter-century peak of 8.1 percent -- will keep climbing. Some economists think it will hit 10 percent by the end of this year. The recession, which began in December 2007, already has snatched a net total of 4.4 million jobs and has left 12.5 million searching for work.
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