Global Biz

Fed, worried about recovery, will buy US debt

(Agencies)
Updated: 2010-08-11 05:54

With interest rates so low, Congress, economists note, has more power than the Fed to stimulate the economy. But with midterm elections nearing, Congress is divided on whether the best move is short-term government spending, tax cuts or some combination.

Investors reacted positively to the statement anyway. Stocks were down sharply before the announcement but made up ground after it was announced at mid-afternoon. The Dow Jones industrial average finished down about 54 points.

Treasury prices rose slightly because the Fed plan would reduce the amount of government debt on the market for others to buy.

The Fed said it would buy two-year and 10-year Treasurys by using the proceeds from debt and mortgage-backed securities it bought from Fannie Mae and Freddie Mac. It said that it would buy additional government debt as its existing Treasury bonds mature.

The effect is that the Fed will keep its $2.3 trillion balance sheet steady -- rather than rolling it back, as it had hoped to do as the economy improved -- while shifting its holdings out of mortgage securities and into more government debt.

"The news is positive but not meaningful," said John Merrill, chief investment officer of Tanglewood Wealth Management in Houston. "The money is a pittance."

The central bank said it expects to start buying the government debt August 17 and planned to publish details Wednesday.

From March 2009 to this March, the Fed bought up $1.25 trillion in mortgage securities and $175 billion in debt from Fannie Mae and Freddie Mac. The goal of these purchases was to drive down mortgage rates and bolster the crippled housing market. The Fed also bought $300 billion of government debt between March and October 2009.

The Fed's balance sheet has stayed at roughly $2.3 trillion since March.

Economists are skeptical that cheaper credit or even more government aid will get Americans shopping more and businesses to hire. They also say some jobs in construction and other housing-related fields, and in manufacturing, will never return to pre-recession levels, a shift in the basic structure of the economy.

High unemployment, lackluster income growth, sagging home values and tight credit are all restraining the pace at which Americans are spending, usually a major source of powering the economy.