Page last updated at 21:18 GMT, Wednesday, 18 March 2009

Fed pumps $1.2tn into US economy

Federal Reserve Board Building, Washington DC
US rates are expected to remain low for some time

The US Federal Reserve says it will buy almost $1.2 trillion (£843bn) worth of debt to help boost lending and promote economic recovery.

It said it would start buying long-term government debt and expand purchases of mortgage-related debt.

The size of the move surprised investors, causing the Dow Jones stock index to jump almost 200 points.

The Bank of England has already begun buying government debt to expand money supply - known as quantitative easing.

The Federal Reserve said it hopes the measures will boost mortgage lending and the struggling housing market by lowering interest rates on mortgages and other forms of consumer debt.

"This is not only going to keep mortgage rates low for a long period of time," said Greg McBride, a senior financial analyst at Bankrate.com.

HOW QUANTITATIVE EASING WORKS
Central bank expands money supply by using newly created money to buy assets from banks and other financial institutions
Aims to boost the economy by giving sellers of these assets money to spend on goods, services or more assets

"The mere announcement may produce a honeymoon effect and bring mortgage rates down to even lower levels in the coming days."

The US central bank also kept interest rates unchanged at close to zero after its two-day policy meeting.

In December, it cut rates as low as they can go - to a range of zero to 0.25%.

The Fed's unprecedented measures come as central banks around the world are grappling with how to fight the worst recession since World War II.

Japan said earlier on Wednesday it would step up its purchases of government debt.

"Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," the Fed said.

All tools

The Fed said it would employ "all available tools" to promote economic recovery.

This is a pretty dramatic move
James Caron, Morgan Stanley

The biggest surprise was the announcement that the Fed would buy up to $300bn worth of government debt, known as US Treasuries, over the next six months.

It also said it would buy an additional $750bn of mortgage-backed securities to boost mortgage lending, bringing total purchases of this type to $1.25 trillion.

It added that it would buy a further $100bn in debt issued by government-sponsored agencies like Freddie Mac, which supports the mortgage market.

"This is a pretty dramatic move," said James Caron, head of global rates research at Morgan Stanley in New York.

The Dow Jones industrial average gained 90.88 points, or 1.23%, to end at 7,486.58 points, reversing early losses.

The move boosted banks and financial shares, with Citigroup up 23% and Bank of America vaulting 22% higher.

However, the announcement hurt the dollar, which hit a two-month low against the euro on fears that the measures would undermine the currency.

The yields payable to holders of government bonds also fell sharply.

The yield on the benchmark 10-year Treasury note fell to 2.5% percent from 3.01% - its biggest one-day slide since the Wall Street crash of 1987.

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