Thursday, November 04, 2010

Federal Reserve Bails Out Economy With $600 Billion

Federal Reserve
In an effort to accelerate an economic recovery, the Federal Reserve (The Fed) will buy $600 billion of U.S. government bonds over the next eight months. Their hope is to drive down interest rates and encourage more borrowing and growth. The $75 billion a month in new purchases of Treasury debt come on top of $35 billion a month the Fed is expected to spend to replace mortgage bonds in its portfolio that are being retired. The Fed now will print money to buy as much as $900 billion in U.S. government bonds through June.

This is the Fed's second experiment with a big bond-buying program. Between January 2009 and March of this year, the central bank purchased roughly $1.7 trillion worth of government and mortgage bonds.

By buying a lot of bonds and taking them off the market, the Fed expects to push up their prices and push down their yields. The Fed hopes that will result in lower interest rates for homeowners, consumers and businesses, which in turn will encourage more of them to borrow, spend and invest. The Fed figures it will also drive investors into stocks, corporate bonds and other riskier investments offering higher returns. The Fed normally would push down short-term interest rates when the economy is weak. But it has already pushed those rates to near zero, leaving it to resort to unconventional measures. (WSJ, 11/3/2010)

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