US Fed launches $400bn stimulus plan

THE US Federal Reserve last night moved to counter what it said were significant risks to the US economy with an effort to lower long-term borrowing costs and bolster housing.

The central bank said it would launch a $400 billion (€295bn) programme to weight its $2.85 trillion balance sheet more heavily toward longer-term securities by selling short-term government debt to purchase longer-dated Treasuries.

It said it would reinvest proceeds from maturing mortgage and housing agency bonds it holds back into the mortgage market, an acknowledgment of how weak housing remains.

The Fed’s action met with a mixed reception in financial markets. Apparently spooked by the central bank’s dismal outlook, US stocks sold off. The Standard & Poor’s 500 index closed down nearly 3%.

Prices for long-term government debt rose, pushing yields lower — a sign the measures were more aggressive than some investors had expected.

The yield on the benchmark 10-year note dropped as low as 1.856%, the lowest in more than 60 years.

“Recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated,” the Fed said in a statement after a two-day meeting.

“There are significant downside risks to the economic outlook, including strains in global financial markets.”

The US economy grew at less than a 1% annual rate over the first half of the year and economists have warned of a heightened risk of recession.

However, analysts said the Fed’s move might not have a great impact, even if it does lower long-term interest rates.

“The cost of borrowing simply isn’t the problem,” said Paul Ashworth, an economist at Capital Economics in Toronto.

“Businesses don’t have the confidence to invest and half of all mortgage borrowers don’t have the home equity needed to refinance at lower rates.”

Still, faced with a lofty 9.1% jobless rate and an escalating sovereign debt crisis in Europe, Fed officials felt they needed to do what they could to try to breathe more life into the sluggish US recovery.

Fed chairman Ben Bernanke’s activism has become a punching bag for politicians.

Top Republican politicians urged the central bank to resist further economic interventions, echoing criticism voiced by Republican presidential candidates.