Fed Seeks to Give Economy a $600 Billion Jolt

By:: Kirk Haverkamp | November 03, 2010

As expected, the Federal Reserve announced today that it will purchase another $600 billion in long-term Treasury securities in an effort to boost the stagnant economy.

The purchases will be made in increments of about $75 billion a month through June of 2011. The amounts may be adjusted in response to changing economic conditions if the Fed sees a need to do so. The Fed will also purchase another $250-$300 billion in Treasury securities during that time by re-investing principal payments earned on agency debt (Fannie Mae and Freddie Mac) and mortgage-backed securities.

The announcement came this afternoon at the conclusion of a two-day meeting of the Fed’s Open Market Committee. The move had been widely expected after the Fed broadly hinted at such steps following its last meeting in September.

A similar, but larger set of purchases announced in March 2009 sent mortgage interest rates tumbling and set off a mortgage refinancing frenzy among homeowners. This time around, the impact is expected to be more subdued, in part because the market has been anticipating the move and adjusted rates accordingly.

The amount of the purchases are in line with what most economists expected, so there were no surprises that might send rates significantly higher or lower. However, some analysts believe the action could result in average rates on 30-year loans declining by about another quarter of a percentage point in coming weeks.

Though some may find it surprising, the move is largely aimed at spurring inflation, which has been mired below a 2 percent annual rate. Although most consumers regard a lack of inflation as a good thing, economists believe some inflation is necessary for economic growth and recent statements from the Fed has expressed concern that inflation remains too low to support its dual mandate of promoting employment and price stability.

Critics express concern that pumping so much money into the economy, on top of the $1.75 trillion in securities purchases announced in early 2009, could lead to runaway inflation or disruptive price bubbles in certain types of assets. Others, however, say that deflation is a greater concern at this time, given the potentially devastating effects it could have by triggering a vicious circle of business revenues and declining asset values.

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