Fed to pump trillion dollars into US economy

The Federal Reserve will inject about $1 trillion (€740bn) into America’s economy in a bold effort to help the battered housing market and lift the US out of recession.

At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25%.

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.

In a new programme, the Fed said it will buy up to €300bn (€223bn) of long-term bonds, a move that 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.

And expanding an existing programme, the Fed said it will buy more mortgage-backed securities guaranteed by mortgage giants Fannie Mae and Freddie Mac.

The US central bank will buy an additional $750bn (€558bn), bringing its total purchases of these securities to $1.25 trillion (€846bn). It also will boost its purchase of Fannie and Freddie debt to $200bn (€148bn).

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

The programme – 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 programme would be beyond that area.

The Fed’s action kept Wall Street’s big rally alive. After being down earlier yesterday, the Dow Jones industrial average added 90.88 points, and broader indicators also rose.

Government bond prices surged. The yield on the benchmark 10-year treasury note, which moves opposite its price, fell to 2.50% from 3.01% late last night.

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

Since the Fed last met 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 US exports, dealing domestic companies another blow, the Fed said.

Still, the Fed hoped its actions, the government’s banking rescue effort, and President Barack Obama’s $787bn (€585bn) 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.

Mr Obama has urged Americans to be patient, saying it will take time for his revival programmes to work.

Mr Bernanke has repeatedly said that stabilising America’s financial system is key to turning around the economy. If that can be done, then the recession might end this year, setting the stage for a recovery next year, he said.

But even in this best-case scenario, America’s unemployment rate – now at quarter-century peak of 8.1 % – will keep climbing. Some economists think it will hit 10% by the end of this year.

The recession that began in December 2007 already has snatched a net total of 4.4 million jobs and has left 12.5 million searching for work in the US.

And the US economy is still sinking. It contracted at 6.2% in the final three months of 2008, also the worst showing in a quarter-century. Analysts believe the economy in the current January-March quarter is contracting at a pace between 5.5 and 6% or more. They expect the economy also will continue to contract in the April-June quarter.