IREF - Institut de Recherches Économiques et Fiscales
Pour la liberté économique et la concurrence fiscale
The Fed had already cut its benchmark interest-rate target to near zero. Unable to go lower, the central bank now is essentially printing money to raise the supply of credit and thus push down the longer-term rates paid by families and companies on mortgages and other key loans. The impact was immediately felt.
Prices on Treasury debt soared, pushing the yield on 10-year Treasury notes down to 2.53% from above 3% the day before — the largest one-day drop since the aftermath of the 1987 market crash. The rate on a 30-year fixed-rate mortgage for credit-worthy borrowers fell to about 4.75%. But the value of the dollar sank, a reminder of the risk the Fed is running by printing money to give the economy a jolt.
The show of force follows months of internal debate. Fed Chairman Ben Bernanke had argued for staying focused on lending to troubled parts of the financial markets instead of buying long-term government bonds, an unorthodox step taken recently by the Bank of England. But Fed officials decided they had to do more as the economy deteriorated.
Wednesday’s move highlighted the central bank’s ability to move aggressively on the financial crisis without approval from Congress. That flexibility is important at a time of growing political hostility toward devoting more taxpayer money to bailouts.
As expected, the Fed policy-making committee voted unanimously to hold its target for the federal-funds rate, at which banks lend to each other overnight, between zero and 0.25%.
"The Fed is living up to its commitment to do everything in its power to deal with the crisis," said Deutsche Bank economist Peter Hooper. "Monetary policy is not going to get us out of this mess by itself. But this is effective life support....keeping things from getting a lot worse."
All told, the Fed will pump as much as an extra $1.15 trillion into the economy via bond purchases. The Fed will buy as much as $300 billion in long-term Treasurys in the next six months. It will increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to $1.25 trillion, up from $500 billion. The Fed also is doubling potential purchases of their debt, to $200 billion.