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Fed To Buy $600 Billion In Treasury Bonds

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Fed To Buy $600 Billion In Treasury Bonds

Economy

Fed To Buy $600 Billion In Treasury Bonds

Fed To Buy $600 Billion In Treasury Bonds

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Federal Reserve policymakers announced a plan Wednesday to pump more money into the economy with a policy known as "quantitative easing." The Fed will buy $600 billion of Treasury bonds over through next June.

ROBERT SIEGEL, host:

The Federal Reserve is going back for more ammunition to try to get the economy moving. Today, Fed officials announced they plan to buy $600 billion of long-term Treasury bonds over the next eight months. The aim is to bring down interest rates, as NPR's Tamara Keith reports.

TAMARA KEITH: When the Fed uses phrases like disappointingly slow, that's not exactly a ringing endorsement of the economic recovery.

Professor ANN OWEN (Economics, Hamilton College): The unemployment rate is unacceptably high. And they're actually even worried that inflation is too low.

KEITH: Ann Owen is a professor of economics at Hamilton College and a former Fed economist. She says given the state of the economy, the Fed had to do something. Normally, it would lower the target for the Fed funds rate, a short-term interest rate.

Prof. OWEN: But that's already down at zero, so they can't lower it anymore.

KEITH: The program announced today takes aim at long-term interest rates. Each month through June, the Fed plans to buy $75 billion worth of Treasury bonds from banks and other investors that hold them using money it creates out of thin air, because the Fed can just do that. Owen says buying all those bonds should bring long-term interest rates down.

Prof. OWEN: They're trying to change the economic behavior of consumers and firms. They're trying to get them to spend more. So one way of doing that is to lower the cost of their spending by lowering interest rates.

KEITH: But it's a pretty blunt tool - one that the Fed doesn't have much experience with. Some worry it could create a bubble or cause inflation problems a few years from now. Even people who support the Fed's action aren't sure it will work.

James Hamilton is a professor of economics at UC San Diego.

Professor JAMES HAMILTON (Economics, UC San Diego): It will help make loans more available to small businesses. It will make it a little bit easier for people to refinance. But let's not have illusions about it solving all our problems because it won't.

KEITH: The fact that the Fed is even trying something so untested is further proof that there's no easy fix for these economic problems.

Tamara Keith, NPR News, Washington.

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