US Fed announces plan to buy $600b government bonds

Updated: 2010-11-04 14


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WASHINGTON - US Federal Reserve announced Wednesday it will buy $600 billion more in Treasury bonds, in a move known as the "Quantitative Easing" (QE2)) monetary policy to boost the sluggish economic growth.

"The pace of recovery in output and employment continues to be slow," the Fed said in a statement after the policymaking panel meeting.

Federal Open Market Committee (FOMC), the interest rate policy making body of the central bank said that it will "purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month."

The Fed also decided to maintain the target range for the federal funds rate at historic low level of zero to 0.25 percent to stimulate the economic recovery.

The central bank cut the interest rate to the current level in December 2008 to tackle the worst recession after the Great Depression in the 1930s. And it has already bought about $1.7 trillion in US government debt and mortgage-linked bonds.

With the US economy growth at only a 2 percent annual pace in the third quarter of this year and the jobless rate seemingly stuck around 9.6 percent, the Fed has come under pressure to do more to stimulate business activity.

Bernanke and his supporters argue that the Fed is failing in both fronts of its dual mandate: sustainable levels of unemployment and inflation.

The Fed said that to expand its holding of government securities is "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate."

Latest data showed that core consumer price index, the key figure to measure inflation, grew only 0.8 percent in September on a yearly base. It was lower than the Fed's comfortable level of inflation ranging from 1.5 percent to 2.0 percent.

In fact, the Fed expressed its concern about deflation in recent documents.

On the unemployment front, with 14.8 million Americans unemployed and unemployment rate hovering at double digit, the Fed has been facing criticism.

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Aiming at further lowering borrowing costs for consumers and businesses that are still suffering from the worst recession since the Great Depression, the Fed's QE2 policy is widely questioned.

Many economists doubt about the policy's effectiveness and worry about its spillover effect on the rest of the world.

"The Federal Reserve's proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilize the global economy," Harvard University economist Martin Feldstein said an article published by the Financial Times on Wednesday.

"Although the US economy is weak and the outlook uncertain, QE is not the right remedy," said the former president of the US National Bureau of Economic Research and former chief economic adviser to President Ronald Reagan.

Critics of the policy also argue that although the recovery is painfully slow, markets should be allowed to do their work. They also worry that if the policy fails the Fed's credibility will be wrecked.

Economists consider that economic growth must reach about three percent for some time to significantly reduce high unemployment.

But more than a year after the recession officially ended, unemployment stubbornly stands at high level.

Economists expect that October's jobless rate, which will be reported on Friday, will remain at 9.6 percent for the third straight month.

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