Fed to Buy Treasurys, Expand Balance Sheet

(Compiler's note: Must read -- If I understand this correctly in order to try and preclude a “depression” the Feds have implemented the “last line of defense” for our nation’s economic security. They are borrowing $$ from ourselves to pay ourselves. This is taking $$ from one pocket and putting it into the other pocket.

This solution has never before worked in the world’s history. Historically, it has lead to a complete collapse of a country’s financial system. In an effort to stop a depression, if not done exactly correct, it will lead to hyper-inflation. (trunk full of dollars to buy a loaf of bread).

If this bubble breaks there is no other workable solution. This decision will decide our economic future and that of out children --- and our elected officials fiddle.)

By JON HILSENRATH and BRIAN BLACKSTONE

The Federal Reserve ramped up its efforts to resuscitate the sagging economy, saying it would purchase up to $300 billion of long-term U.S. Treasury securities in the next few months and hundreds of billions of dollars more in mortgage-backed securities.

By buying long-term government bonds and mortgage-backed securities, officials hope to push up their prices and bring down their yields, and thereby energize the economy. Interest rates on many corporate bonds and consumer loans are benchmarked to U.S. Treasury debt. (Read the Fed's statement.)

The move was a bold statement of force from the central bank, which during months of internal debate on the issue had been hesitant to begin buying long-term government bonds as the Bank of England recently began to do.

The Fed action underscores the central bank's ability to move aggressively to combat the financial crisis without any action by Congress, an important attribute at a time when the political firestorm ignited by bonuses made to employees of American International Group Inc. Other rescue efforts have made Congress hostile to approved any more taxpayer money.

Prices on U.S. Treasury bonds soared on the news and the yield fell sharply. Yields on 10year treasury notes dropped. Stock prices also rose sharply and the dollar sank.

The Fed's steps came against a gloomy economic backdrop. "Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," the Fed said in a statement after its two-day meeting. "Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession"

The Federal Open Market Committee, the Fed's policy making arm, voted 10-0 to hold the target federal-funds rate for interbank lending in a range between zero and 0.25% and to continue using credit programs financed by an expansion of the Fed's balance sheet to stabilize markets. Richmond Fed President Jeffrey Lacker, who dissented in January, went along this time. He had wanted the Fed to focus on buying Treasury purchases as opposed to targeting its lending on various corners of the credit markets. The discount rate that the Fed charges on direct loans to banks was unchanged at 0.5%.

With rates near zero, the Fed is now essentially printing money to increase the supply of credit in the economy.

The Fed said will buy up to $300 billion in long-term Treasurys over next six months. The purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac will push the maximum to as $1.25 trillion, up from the previous $750 billion. The Fed also said it would increase the size of its potential purchases of the mortgage giants' debt to $200 billion from $100 billion.

The Fed's strategy appears to be to double down on the programs that it thinks work. In addition to commercial paper and money market mutual fund facilities, which appear to have stabilized those sectors, Mr. Bernanke has repeatedly highlighted the decline in mortgage rates in response to the agency and mortgage-backed securities facilities, calling it one of the "green shoots" evident in some markets.

By expanding its securities purchase programs, the Fed also is effectively ramping up efforts they can control. The commercial paper program and a new consumer lending program that commences Thursday are driven by how much demand there is in the markets.

Demand has waned for the commercial paper program in recent weeks, a sign that market is returning to health. Meantime, the new consumer lending program the Term Asset Backed Securities Loan Facility, or TALF, has gotten off to a slow start.

The U.S. economy is expected by economists to decline at an annual rate of 5% or more in the current quarter. It plunged at a 6.2% rate in the fourth quarter of 2008, the steepest in a quarter century. The economy is now shedding more than 650,000 jobs per month, pushing the unemployment rate to 25-year highs. One nugget of good news is that consumer spending figures signaled some stabilization since the start of the year.