Fed to buy $300 billion debt; keeps rates unchanged

19 March 2009

In a surprise move, at its open market committee meet the US Federal Reserve yesterday announced its decision to buy a massive $300-billion worth of government bonds over the next six months in an effort to stimulate the sluggish US economy.

Federal Reserve chairman Ben Bernanke and his colleagues ended the two-day meeting by leaving the key short-term bank lending rate at a record low of between zero and 0.25 per cent.

"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability," the Fed said.

The reason behind the Fed's move is to spur lending. More lending would boost spending by consumers and businesses, which would revive the economy.
 
The central bank will also buy an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, doubling its existing plan, as it sought to put a halt to America's housing crash. The Fed's massive purchases of this debt will now reach $1.45 trillion.

In addition, it will consider expanding another $1-trillion scheme, begun only this week, to buy up bonds linked to lending on cars, education, credit cards, and business equipment.

Since the Fed last met in late January, "the economy continues to contract," Fed policymakers observed in a statement issued yesterday.