Fed Buying Long-Term Government Bonds

The Federal Reserve says it will spend up to $300 billion to buy long-term government bonds. The move is aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt. The Fed will also boost its purchase of mortgage-backed securities to $1.25 trillion.

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It's MORNING EDITION from NPR News. Good morning, I'm Steve Inskeep.

RENEE MONTAGNE, host:

And I'm Renee Montagne. Trillions, it seems, have become the new billions. With the U.S. economy still limping along, the Federal Reserve announced yesterday more than a trillion dollars worth of dramatic new moves to get credit flowing. The Fed will begin buying up U.S. Treasury securities and will also put a lot more money into the mortgage markets. Fed officials hope these steps will bring mortgage rates down and encourage more investment. The financial market seemed to like the news. NPR's Jim Zarroli reports.

JIM ZARROLI: Since last September the Federal Reserve has been pouring money into the markets with unprecedented speed, all in an effort to prop up banks and get investors investing again. It's bought up mortgage debt and commercial paper, which plays a critical role in financing businesses. And it's taken steps to encourage student loans and auto loans. Yesterday, Fed officials essentially conceded that these efforts have fallen short of their goals. Ann Owen is a professor of finance at Hamilton College.

Professor ANN OWEN (Hamilton College): There are some indications that some of these efforts have been successful. I think that the concern right now is that it's just not enough.

ZARROLI: So Fed officials did something they've been talking about for some time. They said they would buy up $300 billion worth of U.S. Treasury securities. They will also purchase another $750 billion dollars in securities issued by the mortgage giants Fannie Mae and Freddie Mac, more than doubling their holdings in these assets. Vincent Reinhart is a former Fed economist, now with the American Enterprise Institute.

Mr. VINCENT REINHART (American Enterprise Institute): Those securities are out there. They're trading. They are on the books of lots of different private firms. The Federal Reserve is going to enter the market and buy those securities.

ZARROLI: Reinhart says that by showing its willingness to buy them, the Fed hopes to send a message to investors that these assets are safe to hold. That way they won't get stuck with them if the economy keeps shrinking.

Mr. REINHART: There's lots of concerns about the overall state of the U.S. economy. By being willing to purchase private assets, by being willing to purchase Treasury assets, the Federal Reserve is saying they are willing to absorb some risk from the system.

ZARROLI: And if the Fed can convince investors they're willing to absorb some risk, then investors might be more willing to dip their toes into the financial markets. With more money flowing in, there will be more capital sloshing around. It will be easier to get loans and economic activity will pick up. That's the thinking anyway. Again, Ann Owen…

Prof. OWEN: The intent of all this is really the same. The intent is to get the credit markets working, to get loans to businesses and consumers.

ZARROLI: There are risks to this strategy. The Federal Reserve has now quadrupled its balance sheet. That is, it now holds two trillion dollars, most of it in assets and securities it's purchased recently. The Fed can buy these assets essentially by creating new money. But Vince Reinhart says it will have to sell them off at some point.

Mr. REINHART: If the Fed Reserve were not able to unwind this policy accommodation - that is, when markets get better and when the economy gets better, if they couldn't shrink their balance sheet back in size - then you'd have to worry about inflation. But that's something down the road.

ZARROLI: For now, Reinhart says, the Fed's moves are probably the right thing to do, considering the serious and prolonged economic slowdown the nation has fallen into. The financial market seemed to agree yesterday. Stocks rose after the Fed announcement and the price of U.S. Treasury securities rose sharply.

Jim Zarroli, NPR News, New York.

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