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Fed sees $600 billion boosting economy

Updated: 11/04/2010 @ 11:22am

THE EVENT: The Federal Reserve on Wednesday unveiled a controversial new plan to buy $600 billion of U.S. government debt over the next eight months, hoping to spur growth in a slow U.S. economy.

Fed officials decided to go ahead with the much-anticipated program, and said they stand ready to purchase more bonds if the economy's persistent weakness leads inflation to remain too low and unemployment too high.

THE DETAILS: The Fed said it expects to buy $850 billion to $950 billion in Treasurys through the end of the second quarter of 2010. That's because in addition to the $600 billion, the Fed expects to buy about $35 billion a month to replace mortgage bonds in its portfolio that are being retired, a decision that was taken in August.

Fed officials also stuck to their pledge to keep short-term interest rates at a record low for an "extended period."

THE REASONS: By buying government bonds, the Fed aims to keep long-term interest rates low, hoping that will lead consumers to spend and companies to invest more, thus helping to propel the economy. Short-term interest rates were slashed close to zero in December 2008, so the Fed no longer has its traditional rate-cutting weapon to boost the economy.

THE MARKETS: The Fed delivered a plan that was basically in line with market expectations, which spurred some Treasury investors to cut some holdings to book profit. Treasurys were steady after the announcement, but subsequently dropped sharply.

The 30-year Treasury bond tumbled Wednesday, erasing earlier gains as it wasn't favored in the Federal Reserve's government-debt buying program aimed to support the economy.

The benchmark 10-year note also reversed a rally made before the Fed's latest interest rate statement.

U.S. stocks swung in and out of positive territory after the announcement. The Dow Jones Industrial Average was recently up.

The dollar fell, but soon recovered most of its losses against major competitors.

LOOKING FORWARD: Economists inside and outside the Fed have warned the move could be ineffective because interest rates are already so low. Some say it could backfire, sparking new asset bubbles or higher inflation in the next few years.

WHAT THEY SAID: "Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters," the central bank said.

(END) Dow Jones Newswires
November 03, 2010 14:59 ET (18:59 GMT)
Copyright (c) 2010 Dow Jones Company, Inc.

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