US Fed puts $600bn into economy, says recovery too slow

03 November 2010 19:25  [Source: ICIS news]

WASHINGTON (ICIS)--The US Federal Reserve Board on Wednesday said it would purchase $600bn (€426bn) worth of Treasury Department securities in a bid to lower long-term interest rates, noting that the US economic recovery has been disappointingly slow.

The Federal Reserve, the US central bank, also maintained the longstanding and record low federal funds interest rate at 0% to 0.25% and indicated that the rate would be continued at that level indefinitely.

The Fed’s decision to maintain the low interest rate was a foregone conclusion, and market analysts were focused more on the central bank’s new efforts to further stimulate the nation's economy and reduce long-term borrowing rates for businesses.

The decision to purchase up to $600bn worth of Treasury notes simply means that the Fed is essentially printing money and pumping still more cash into the US economy as another stimulus measure. 

Analysts suggested that in addition to possibly bringing down long-term loan rates, the Fed action also was likely to weaken the US dollar against other currencies, which in turn would make US exports more competitive and also make imports of foreign goods more expensive.

The central bank’s major policy group, the Federal Open Markets Committee (FOMC), said that the move to buy Treasury notes was in recognition that “the pace of recovery in output and employment continues to be slow”.

“Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit,” the committee said.

“Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in non-residential structures continues to be weak,” the Fed added.

“Employers remain reluctant to add to payrolls,” the bank’s governors and economists said, noting too that “Housing starts continue to be depressed.”

The recovery, said the Fed, “has been disappointingly slow”.

Citing the continued high unemployment rate - still at 9.6% - and saying that there appeared to be little risk of inflation, the Fed said that it would increase its holdings in Treasury notes “to promote a stronger pace of economic recovery”.

Toward that goal, the Fed statement said that “the committee intends to purchase a further $600bn of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75bn per month”.

($1 = €0.71)

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