Fed to Buy $600 Billion in Bonds to Stimulate Economy

Federal ReserveThe Federal Reserve on Wednesday announced its plans to try to invigorate the US economy by buying $600 billion of Treasury bonds. Federal Reserve officials said it would buy approximately $75 billion a month in long-term government bonds on through to mid-2011 in order to further drive down interest rates on debt. By buying so many bonds the Fed hopes to push down the interest rate.

Back in 2009 the Fed purchased $1.7 trillion in mortgage bonds and Treasury bonds. Those purchases helped lower the long-term inteest rates on mortgage and corporate business loans. The program was widely credited with helping to lift the country out of recession, and so the same tactic is being applied.

The risk to the Federal Reserve plan is that it will drive down the value of the dollar on world markets leading to price inflation, higher costing imports, and possibly even trade disputes with other countries, an event reminescent of the Great Depression. Bond traders, fearing inflation, might even derail the Fed’s efforts by pushing rates higher.

The Fed also pledged to hold its key interest rate, which has been nearly zero since December 2008, at a record low near zero for “an extended period.”

Some economists feel that even with this stimulus the GNP growth rate will still be far less than 3%, and won’t make a dent in unemployment.



 

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