Feds Plan to Buy Debt to Spur Growth

The U.S. Federal Reserve plans to buy more government debt to spur economic recovery

The U.S. Federal Reserve would use cash from mortgage bonds to buy more government debt in its latest effort to halt a recent slide in the U.S. economic recovery.

The planned move by the central bank signals a major policy change involving the reinvesting of about $1.3 trillion from maturing mortgage-linked debt which was incurred during the 2008 financial meltdown designed to limit borrowing costs then.

There was a raging debate about some kind of exit plan from the costly stimulus package used during the financial crisis but the Federal Reserve chose to downgrade its economic outlook after finding the latest economic data to be weaker than expected.

Back in June, the Fed had announced the economic recovery as “proceeding.” But after a one-day policy meeting acknowledged that "The pace of recovery in output and employment has slowed in recent months."

Most investors did not expect that the Fed will make any major new action. Some who did expect said that they believed the funds would be funnelled back into mortgage securities.

If economic recovery weakens further, analysts expect that a less aggressive monetary policy approach may be taken by the Fed.

"Should the outlook continue to worsen, the Fed will likely initiate a new round of asset purchases," said Michael Gapen, economist at Barclays Capital.

After the announcement, U.S. stocks still closed lower on the day despite reducing losses. The U.S. dollar fell against the yen and the euro.

The Fed kept overnight interest rates at zero to 0.25 percent, in line with its long-term plan to keep it steady.

Posted by James Fried on Wednesday August 11 2010, 11:05 AM EST. All trademarks acknowledged. Filed under Featured News, Finance. Comments and Trackbacks closed. Follow responses: RSS 2.0