The central bank will increase its purchases of mortgage-backed securities by $750 billion, on top of a previously announced $500 billion. It also will double its purchases of debt in Fannie Mae andFreddie Mac to $200 billion. Those steps are intended to lower mortgage rates. The announcement of the previous purchases pushed mortgage rates down a full percentage point.
The Fed also said it will buy $300 billion in long-term Treasury bonds, a step it had previously considered but had been reluctant to act on. That move will lower long-term interest rates for the U.S. government directly and, Fed officials hope, will indirectly lower borrowing costs for businesses and individuals.
Following today's announcement, Treasury bond prices spiked and yields on those bonds declined, as traders anticipated the Fed bond purchases. At 2:30 p.m., 15 minutes after the announcement, the yield on 10-year Treasury bonds had fallen half a percentage point, to 2.53 percent.
The stock market also rose steeply, with the Standard & Poor's 500-stock index up 2.2 percent at 2:30 p.m.
Since the last meeting of the Fed's policymaking arm, "job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," the Federal Open Market Committee said in a statement. "Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment."
"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability," the statement said.
Since cutting the interest rate it controls to essentially zero in December, the Fed has had to find other tools to try to combat a rapidly deepening recession. At its policymaking meeting that concluded today, the central bank left that rate at a range of zero to 0.25 percent.
The vote was unanimous, in contrast to the FOMC's previous meeting, at which one official dissented.
The Fed essentially has unlimited ability to supply cash during a financial crisis by expanding its balance sheet at will, reflecting its power to create money.
