NY Times
The Federal Reserve, concerned about the slow recovery, announced a second, large purchase of Treasury bonds on Wednesday, an effort to spur economic growth by lowering long-term interest rates.
The Fed said it would buy an additional $600 billion in long-term Treasury securities by the end of June 2011, somewhat more than the $300 billion to $500 billion that many in the markets had expected.
The central bank said it would also continue its program, announced in August, of reinvesting proceeds from its mortgage-related holdings to buy Treasury debt. The Fed now expects to reinvest $250 billion to $300 billion under that program by the end of June, making the total asset purchases in the range of $850 billion to $900 billion.
That would just about double the $800 billion or so in Treasury debt currently on the Fed’s balance sheet.
While the Fed has been signaling that it would act to bolster the economy, the announcement was the first major policy move since the midterm elections, which gave Republicans control of the House and heightened the potential for gridlock on fiscal policy including tax cuts and spending to encourage job creation and growth.
In justifying its decision, the Fed noted that unemployment was high and inflation low, and judged that the recovery “has been disappointingly slow.”
The Federal Open Market Committee, which ended a two-day meeting on Wednesday, also left open the possibility of additional purchases.
“The committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability,” the committee said.
As expected, the Fed left the benchmark short-term interest rate — the federal funds rate, at which banks lend to one another overnight — at nearly zero, where it has been since December 2008. The committee’s vote was 9 to 1.
Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, dissented, as he has at every meeting this year. Mr. Hoenig “was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy,” the Fed said in a statement.
In a statement after the F.O.M.C. announcement, the New York Federal Reserve, which handles the bond purchases, said the purchases will include bonds ranging for less than 2 year to 30 years, with “an average duration of between 5 and 6 years.”
“The distribution of purchases could change if market conditions warrant,” the New York Fed said in a statement, “but such changes would be designed to not significantly alter the average duration of the assets purchased.”
Economists disagree about how much the new round of debt purchases — a reprise of an initial, $1.7 trillion round that ended in March — will have on spurring consumer and corporate demand.
Lower long-term interest rates in theory should ripple through the markets, affecting other rates, like those of 30-year, fixed-rate mortgages. That could encourage homeowners to refinance into cheaper mortgages, though it would not help the millions of Americans facing foreclosure.
But there are several significant risks. The new actions are likely to further drive down the value of the dollar, which as fallen about 7.5 percent since June against the currencies of major trading partners. That could exacerbate the trade and exchange-rate tensions that have threatened to unravel cooperation among the world’s biggest economies.
Moreover, the Fed is exposing itself to the risk that the assets it has purchased, like the $1 trillion in mortgage-related securities on its balance sheets, could shrivel in value as interest rates rise. That could reduce the amount of money the central banks turns over to the Treasury each year, and expose the Fed — which has been attacked for failing to prevent the 2008 financial crisis — to further criticism.
And then there is a risk that the Fed’s action could be neutralized by a new Congress that has vowed to contract government spending, a core argument that led to the overwhelming Republican victory on Tuesday.
Mr. Obama, at a news conference on Wednesday, talked of compromise with the new Republican majority in the House. But he also cited China’s new high-speed trains and its advances in supercomputing to make the case that there are some areas where the United States needs to make investments, and insisted that the country would not shy away from those. “They are making investments, because they know those investments will pay off in the long term,” he said of the Chinese, seeming to suggest that the United States needs to do the same.
At the same moment, he reiterated that he would support continuing the Bush era tax cuts only for families earning less than $250,000 a year. “It is very important we’re not taking money out of the system from people who are most likely to spend that money,” Mr. Obama said at the news conference.
But he hinted at flexibility, saying he expected to sit down with the new Republican leadership to see “where we can move forward first of all in ways that can do no harm.”
Asked if he was willing to negotiate, he said, “Absolutely.”
Laurence H. Meyer, a former Fed governor who closely monitors the central bank, said the prospect of sustained fiscal gridlock had already pushed Mr. Bernanke to move.
“Bernanke has said that fiscal stimulus, accommodated by the Fed, is the single most powerful action the government can take for lowering the unemployment rate ,when short-term rates are already at zero,” Mr. Meyer said. “He has nearly pleaded with Congress for fiscal stimulus, but he can’t count on it. So he has to act as if that’s not going to happen. “
Mr. Meyer predicted: “The political drama is just beginning.”
Leonard J. Santow, an economic consultant, said he feared that the Fed was reacting to one mistake — the failure of fiscal policy — by adding another.
“Monetary policy is already unsustainably easy, and adding to the Fed’s generosity through more quantitative easing will do little to stimulate the economy,” Mr. Santow said. “The main problem is on the fiscal side and there is nothing wrong with the Fed chairman making budget recommendations and admitting there is not a great deal left for monetary policy to achieve when it comes to stimulating the economy.”
The Fed lowered short-term interest rates to nearly zero in December 2008, and subsequently bought $1.7 trillion in mortgage-backed securities and government securities, a program that was phased out last March.
Only months ago, the Fed was talking about returning to normal monetary policy and discussing the timetable for eventually raising interest rates and tightening the supply of credit, as it would normally do after a recession has ended.
But this recession and its painful aftermath have been anything but normal. Global financial markets were set back in the spring by the European debt crisis in Europe, and over several months, Fed officials gradually became convinced that their only option was to step back in again.
