Federal Reserve buying bad & U.S. debt

by Maura Reynolds

The Federal Reserve today announced an aggressive program to bolster the housing and credit markets by more than doubling their purchases of mortgage-backed securities and U.S. Treasury bills in an efforts to free up credit and lower mortgage rates.

The central bank said it was taking the unexpected action because the economy remains on life-support.

"Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," the Fed's rate-setting committee said in a statement. "Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession."

But the Fed said that the new purchases, combined with the government's upcoming program to stabilize banks, will help jumpstart the economy.

"Although the near-term economic outlook is weak, the committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth," the committee said.

The Fed said it would spend an additional $750 billion to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac, bringing total purchases for 2009 to $1.2 trillion. And it would spend $300 billion to buy long-term U.S. treasuries, a move that is expected to lower interest rates for ordinary borrowers.

In addition, the central bank said would double its purchases of Fannie Mae and Freddie Mac debt from $100 billion to $200 billion.

The announcement came at the end of a regularly scheduled meeting of the Fed's rate-setting committee, which also announced that it would keep the interest rates it charges banks essentially at zero.

Although the Fed has kept rates near zero for months, interest rates for consumers and businesses have remained significantly higher because banks continue to be cautious about issuing new loans as the economy declines.