US Federal Reserve to buy $600bn of bonds

Wednesday 03 November 2010 22.44
New York Federal Reserve - Expected to make up to $900bn in purchases
New York Federal Reserve - Expected to make up to $900bn in purchases

The Federal Reserve have committed to buying $600bn (€424bn) more in government bonds by the middle of next year in an attempt to boost the struggling US economy.

The decision 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 US central bank said it would buy about $75bn (€53bn) in longer-term Treasury bonds per month. It has said it would regularly review the pace and size of the programme and adjust it as needed depending on the path of the recovery.

The Federal Reserve has described the economy as ‘slow’ and said employers remained reluctant to add to payrolls and that measures of inflation were ‘somewhat low.’

The central has bank repeated its vow to keep the federal funds rate on overnight loans ultra-low for an extended period.

Some analysts had speculated the Fed might broaden this commitment.

Kansas City Federal President Thomas Hoeing continued his streak of dissents, saying the risk of additional securities purchases outweighed the benefits.

In a separate statement, the New York Federal Reserve said it would temporarily relax a rule limiting ownership of any particular security to 35%. It said holdings would be allowed to rise above that threshold 'only in modest increments.'

Including the Fed's ongoing plan to reinvest maturing assets, the New York Fed expects to conduct $850bn (€601bn) to $900bn (€636) in Treasury purchases through the end of the second quarter of 2011.

With the US economy expanding at only a 2% annual pace in the third quarter of this year and the jobless rate seemingly stuck around 9.6%, the Fed had come under pressure to do more to stimulate business activity.

The central bank had already cut overnight interest rates to near zero in December 2008 and bought about $1.7 trillion (€1.2 trillion) in US government debt and mortgage-linked bonds.

Those purchases, however, occurred when financial markets were stricken by crisis, and economists and Fed officials alike are divided over how effective the new program will be.

Further bond purchases, however, are viewed with a sceptical eye by many economists and some Fed officials.

Indeed, some worry further bond buying could do more harm than good by providing tinder for inflation that will ignite when the recovery finally gains traction.