Fed unveils mega US$1 trillion financial stimulus

The Federal Reserve said that it will employ all available tools to promote economic recovery in the United States and to preserve price stability. The Federal Open Market Committee (FOMC), the central bank's policy-setting arm, said it will maintain the target range for the federal funds rate at ZERO to 0.25% and anticipates that economic conditions are likely to warrant exceptionally low levels of federal funds rate for an extended period. Separately, the Fed decided to purchase up to US$300bn of longer-term Treasury Securities over the next six months to help improve conditions in private credit markets. It will increase the size of the balance sheet further by purchasing up to an additional US$750bn of agency mortgage-backed securities to provide greater support to mortgage lending and housing markets. This brings the Fed's total purchases of these securities to up to US$1.25 trillion this year. The Fed will also increase its purchases of agency debt this year by up to US$100bn to a total of up to US$200bn.

The Fed has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The FOMC said that it will continue to carefully monitor the size and composition of the Fed's balance sheet in light of evolving financial and economic developments. Prices of a slew of commodities surged, led by gold and crude oil as the Fed's decision to pump more than US$1 trillion into the US economy stoked fresh fears that inflation could stage a come back. Gold prices soared 8% to their highest close in nearly a month, while oil jumped above US$51 a barrel. The Fed's bond-buying program will pump hundreds of billions of dollars into the US financial system in an effort to lower interest rates and boost lending. But the plan could also weaken the dollar and trigger inflation going ahead.

Gold is traditionally used by investors as a hedge against inflation, so demand for the precious metal tends to increase when the dollar is weak. On Thursday, the dollar sank against other major currencies. A weaker dollar in turn is bullish for commodities. Copper futures hit a four-month high and grain prices rallied on the Chicago Board of Trade. While it is tough to say whether inflation will actually start shooting up due to the Fed printing unprecedented amount of money, fresh fears over inflation will most likely drive prices for commodities higher, especially if the dollar remains under pressure.