The Fed said it would buy about $75 billion a month in
long-term government bonds through the middle of 2011 to further drive down
interest rates on mortgages and other debt. This is in addition to an expected
$250 billion to $300 billion in Fed purchases over the same period from
reinvesting proceeds from its mortgage portfolio.
The idea is for cheaper loans to get Americans to spend more
and stimulate hiring. The Fed said it will monitor whether adjustments are
needed depending on how the economy is performing.
Some worry the Fed action will do little to boost the
economy because interest rates are already historically low. Others fear the
bond purchases could drive inflation too high over the long term and unleash
speculative buying in assets like stocks.
The financial markets, which had priced in the Fed's move
for weeks, didn't move much after the announcement. The Dow Jones Industrial
Average fell 26 points soon afterward.
In announcing the action, the Fed said the pace of the
economy continues to be slow. Companies remain reluctant to hire, housing
activity is depressed and consumers are increasing their spending only
gradually.
Thomas Hoenig, president of the Federal Reserve Bank of
Kansas City, dissented for the sixth straight meeting. He says the risks of the
Fed's extra stimulus outweigh the potential benefits.
With the economy weak, the Fed doesn't want to take chances
that it could get stuck in the kind of economic stagnation and deflation
problems that gripped Japan and led to a "lost decade" during the 1990s.
Deflation is a widespread and prolonged drop in prices of
goods and services, in wages and in the values of homes and stocks. Deflation
makes it harder for people and companies to pay their debts, pushing up home
evictions and bankruptcies.
Fed policymakers expressed disappointment that they haven't
been able to reduce unemployment — now at 9.6 — and raise inflation to levels
more in line with a healthy economy. Progress toward those goals has been
disappointingly slow, the Fed acknowledged in its post-meeting statement.
The Fed has tried since the 2008 financial crisis to keep
credit available to individuals and businesses. It's done so, in part, by
keeping the target range for its bank lending rate near zero.
It also pursued the unorthodox strategy of buying long-term
bonds. The Fed's purchases are so vast that they push down the rates on those
bonds.
In 2009, the Fed bought $1.7 trillion in mortgage and
Treasury bonds. Those purchases helped lower long-term rates on home and
corporate loans. The program was credited with helping to lift the country out
of recession.
The action comes one day after voters frustrated by
unemployment, scant pay gains and soaring home foreclosures punished Democrats
and handed control of the House to Republicans. Democrats kept control of the
Senate.
The split will make it harder for President Barack Obama to
enact any major economic initiatives. That could put more pressure on the Fed
to get the economy back on firmer footing.
Once again, the Fed pledged to hold its key interest rate at
a record low near zero for "an extended period."
