Fed Moves Again To Shore Up Economy

The Federal Reserve says it will buy up to $300 billion in long-term Treasury bills — and will increase lending in existing programs by another $750 billion. The moves underline the power the Fed holds beyond simply controlling interest rates.

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MICHELE NORRIS, host:

From NPR News this is ALL THINGS CONSIDERED. I'm Michele Norris.

MELISSA BLOCK, host:

And I'm Melissa Block.

The Federal Reserve gave another big jolt to the nation's credit markets today. In a surprise move the fed said it would buy some $300 billion in US Treasury securities. It's the first time the fed has taken such a step. It will also buy another $750 billion in mortgage debt. And NPR's Jim Zarroli joins us to explain what's going on. Jim, what does the fed hope will happen as a result of these moves?

JIM ZARROLI: Well, as you pointed out the fed has announced two separate steps, buying Treasury securities for this first time and also buying more mortgage debt. But together they represent a big expansion of what the fed has already been doing for months. Keep in mind there is this huge marketplace for securities out there, securities issued by Fannie Mae and Freddie Mac, securities issued by the Treasury Department and fed is saying to investors if you right now own some of these securities, you don't have to worry, we're coming into by them. The message that the fed is trying to convey is, you know, you're not going to get stuck holding these securities. It's safe to get into this market.

Because when investors buy these securities the money they pay for them, you know, goes into the credit markets. It gets invested, there's more lending, there's more economic activity and, of course, that is what the economy really needs right now.

BLOCK: Now, as you mentioned, the fed has been buying mortgage-backed securities for several months now. Is there a sign that that's actually working?

ZARROLI: Yeah, it's having some impact. The commercial paper market, which is where businesses go to get credit when they need it, that's improved. Mortgage rates are down somewhat. I think definitely the fact that they have had to announce this expansion suggests that, you know, it hasn't worked as fast as they would like, they need to do more. They have to ratchet up their efforts over the - actually this week we've seen the launch of something called the Term Asset-Backed Lending Facility, it supposed to buy up securities used for consumer credit. The aim there again is to generate more consumer lending, more auto loans, student loans, just more activity in general.

BLOCK: Jim, is there a risk to the fed's buying up so much debt?

ZARROLI: Well, the fed has already bought up a lot of securities already. It's quadrupled the size of its balance sheet, in other words the securities - its whole - the amount of money it sent out into system is now, you know, the balance sheet is now about $2 trillion. So, the fed can do this because it is the fed, it can create money just with a computer key stroke. It can do this as much as it wants and almost any economist you talk to will say this is fine, the fed needs to do this if the economy is in bad shape. But, at some point the fed has to pay these off. Eventually, the fed is going to be stuck with a lot of these assets. It has to unwind them.

In other words sell them and if it does that too quickly it takes capital out of the system too fast and it makes it harder for the economy to rebound.

BLOCK: Well, the financial market seemed to like this news today?

ZARROLI: Yeah, it sent interest rates on Treasury bills down pretty dramatically right away. There are also people who were saying, you know, it's going to have a big effect on mortgage rates over the next few days and that -which will make it easier to refinance. You know, the one thing - of course that remains to be seen. One of the lessons of the past few months is that, stimulate - these kind of measures to stimulate the economy have always turned out to be harder than anyone expected.

BLOCK: Okay, Jim, thanks very much.

ZARROLI: You're welcome.

BLOCK: NPR's Jim Zarroli in New York.

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