Fed unveils new US$600bn bond purchase program

The Federal Reserve announced plans to pump hundreds of billions of dollars into the US financial system in yet another unconventional effort to try and jolt the US economy out of a deep slumber. The Fed will, in effect, print money to buy Treasury bonds worth an additional US$600bn by June 2011 in a bid to lower long-term interest rates and avoid deflation. The action should make it cheaper for Americans to borrow money, take out mortgages or refinance their houses, and for businesses to borrow funds in order to expand. But the big question remains whether they will take the bait or not.



The move was widely anticipated, but some experts and market pundits had expected the Fed to announce an even more aggressive package of bond purchases. Interest rates rose on financial markets following the FOMC announcement. The yield on 30-year Treasury bonds jumped 0.17% to 4.04% after the Fed policymakers said that concern that it's asset-purchase program will fuel inflation are "overstated." The financial markets had priced in the Fed's move for weeks, and stock indexes didn't move much after the announcement.

In a statement accompanying the decision, the Fed's policymaking committee emphasised that the action was driven by stubbornly high unemployment and ultra-low inflation. "Information on the economy received by Fed members since the last policy committee meeting in September "confirms that the pace of recovery in output and employment continues to be slow," the FOMC said.

The Fed will keep its options open, potentially extending the purchases if the economy continues to underperform or even reducing them if growth were to bounce back. The Fed kept its benchmark interest rate at zero to 0.25%, where it has been since December 2008. Several top Fed officials have expressed resistance to the second round of quantitative easing, including Thomas Hoenig, president of the Kansas City Fed, who dissented in the latest FOMC meet.