WASHINGTON (MarketWatch) — The Federal Reserve pledged on Wednesday to start a controversial new billion bond-buying spree to rescue the economy from its current doldrums. The Fed said it would buy up to $600 billion in long-term Treasurys until the end of June 2011, about $75 billion this month, in a strategy called quantitative easing.
This is the second time the Fed has engaged in quantitative easing, as it snapped up $1.7 trillion in mostly housing-related assets December 2008 and March 2010.
The Fed’s new move comes because the central bank disappointed with the slow pace of growth and worried that the high 9.6% rate of unemployment might put enough downward pressure on inflation to tip the economy into deflation or a period of a sustained drop in prices. The Fed said that the recovery has been “disappointingly slow.”
The Fed purchases are designed to bring down yields on government bonds believing that lower rates could always give the recovery a boost. More broadly, the Fed wants to prompt private businesses and investors to begin to act with more confidence and help get the economy’s juices flowing. “They are trying to break through the fear,” said J.P. Morgan Chase economist James Glassman.
Doubts persist about whether the plan will work, but many feel the Fed had little choice but to act.
The Fed’s favorite policy tool, the target federal funds rate for interbank lending, has been about as low as it can go, in a range between zero and 0.25%, since December 2008. The Federal Open Market Committee voted 10-1 to use the credit markets tools.
Still, some observers fret that the move will boost asset markets and not the broader economy.
Full Article At Marketwatch
WHY QE2 IS CLOSER TO $1 TRILLION
UPDATE: BusinessInsider.com added some great insight that makes QE2 Closer To $1 Trillion
“But there will also be a reinvestment of $250 to $300 billion from payments associated with other securities it already holds. That makes QE2 feel a whole lot bigger, and closer to the top end $1 trillion number that was mentioned.”