US Fed moves to lower long-term interest rates

21 September 2011 20:25  [Source: ICIS news]

WASHINGTON (ICIS)--The Federal Reserve Board announced steps on Wednesday designed to lower long-term US interest rates, citing continued weakness in the nation’s economy and “significant downside risks to the economic outlook”.

The Fed, the US central bank, said that over the next 15 months it would purchase $400bn (€292bn) worth of US Treasury long-term securities, ranging from six-year to 30-year maturities, while at the same time selling an equal amount of its current holdings of short-term Treasuries, those with maturities of three years or less.

“This programme should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” said the bank’s rate-setting federal open markets committee (FOMC).

If the Fed’s move does succeed in bringing down rates on longer-term Treasuries, that in theory could put downward pressure on a variety of commercial and personal bank instruments, including household mortgage loans and capital development loans.

According to the Fed’s plan, that in turn should encourage more individuals and businesses to borrow, and give banks more liquidity to issue loans.

The Fed also noted that it was maintaining its longstanding and record-low federal funds interest rate at 0-0.25%.

That was expected, because the Fed had announced in early August that it would maintain the near-zero interest rate for at least two years or well into the middle of 2013.  That unprecedented measure also was aimed at providing business with a certain period of interest certainty and stimulating business borrowing and investments.

In announcing its plan to buy-down interest rates on long-term Treasuries, the Fed said that it was acting because US economic growth remains slow, citing continuing weakness in the labour market, the high unemployment rate, and the ongoing depression in the housing sector.

The committee said that while it expects some improvement in the pace of the US recovery over coming quarters, it also expects that unemployment will improve only gradually.

“Moreover, there are significant downside risks to the economic outlook,” the Fed said, citing in particular “strains in global financial markets.”

The latter statement apparently was in reference to the looming Greek default and a possible resulting collapse of the euro and possibly widespread bank failures in Europe.

($1 = €0.73)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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