Fed to Buy $600 Billion in U.S.Bonds to Try to Jump Start the Economy

The Federal Reserve sailed into uncharted waters today by committing to buy $600 billion more in government bonds (at a rate of $75 billion per month) by the middle of next year to give the U.S. economy a jump start.

This is the full text of the statement from the Federal Reserve's Federal Open Market Committee issued on Wednesday following a two-day meeting on monetary policy:

"Information received since the Federal Open Market Committee met in September confirms 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. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak.

Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings.

In addition, the Committee intends to 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 Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy."

Fed Raises Discount Rate in Move Against Banks; Dollar Soars

The Fed Reserve will raise the discount rate, effective today, to 0.75 percent from 0.50 percent, it said after the trading close.

Graham Bowley and Eric Dash of The New Times write that it's a signal to "banks that the nation’s banks had healed enough to withdraw some of the extraordinary support that Washington put in place during the financial crisis." Those low rates helped accelerate the banks' recovery.

Even though the Fed had telegraphed its intention to raise the largely symbolic discount rate, the timing of the move, coming between scheduled policy meetings, caught some economists by surprise. Stocks and bonds sank in after-hours trading, suggesting Friday could be an anxious day for the markets.

“This is a victory lap by the Fed,” Zach Pandl, economist at Nomura Securities, said. “It is a signal that the Fed is very confident in the health of the banking system. Fundamentally, these actions are a sign of policy success.”

The move gave the U.S. Dollar some strength against foreign currencies. The dollar rose 0.2 percent to $1.3578 per euro at 4:30 p.m. in New York, from $1.3607 yesterday, Bloomberg News reported. The yen was at 91.48 versus the dollar from 91.25.

Dave Shellock in London and Nicole Bullock in New York, writing for the Financial Times, see a rough ride in next day's trading:

The Fed's move potentially sets up a volatile trading session for today across global markets. This comes after mixed signals yesterday about the US economic outlook and lingering concerns over sovereign debt.

The Fed will raise the discount rate, effective today, to 0.75 per cent from 0.50 per cent. The Fed said the move does not signal a change in policy outlook.

"This is just a small step in the well advertised 'exit strategy' as the Fed tries to normalise and remove its previous emergency measures," said Jim Caron, head of global rate research at Morgan Stanley.

Yesterday, global equities cautiously progressed and the dollar vacillated amid some uncertainty about when the Federal Reserve might start removing stimulus measures given the hesitant nature of the US economic recovery.

The dollar hit a nine-month high against the euro on the currency markets in early trade, although it retreated as US economic figures painted a mixed picture. After the Fed news, the dollar rose against both the euro and the yen.

Oil futures sank, Claire Rangel of Dow Jones Newswires reported at 5:12 p.m. Eastern Thursday:

In electronic trading, light, sweet crude for March delivery was trading at $78.38 a barrel, after settling up $1.73, or 2.2%, higher at $79.06 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled $1.51, or 2%, higher at $77.78 a barrel.

Bloomberg reported at 9:44 p.m. Eastern Thursday that GOLD 100 OZ FUTR (USD/t oz.) was down 12.60 to $1,106.10, representing a 1.13 percent drop.

Obama Proposing Wide Powers to Seize Financial Corporations

President Barack Obama will unveil his proposal to further regulate the financial industry in his effort to avoid a repeat of the market meltdown we experienced last fall.

The New York Times has the 85-page proposal online. Stephen Labaton of the Times explains its reach:

The plan the president will formally announce on Wednesday would give the Federal Reserve greater supervisory authority over large financial institutions whose problems pose potential risks to the economic system. It would separately expand the reach of the Federal Deposit Insurance Corporation to seize and break up troubled financial institutions. And it would create a council of regulators, led by the Treasury secretary, to fill in regulatory gaps.

In doing so, the plan seeks to give Washington the tools to police the shadow system of finance that has grown up outside the government’s purview, and to make it easier for regulators to head off problems at large, troubled institutions or take control of them if they fail.

The Fed is the big winner in this proposal, but blogger Matthew Goldstein asks, who will the Fed be accountable to in this new order?

Now this is not meant to knock the job the Fed has done in the current financial crisis. In many respects, Fed Chairman Ben Bernanke should be applauded for showing a willingness to improvise and come up with creative solutions for trying to limit the damage to the banking system and the economy. But throughout the crisis, Benanke & Co. have shown an utter disdain for transparency and full disclosure.

A good illustration of this is the contracts the NY Fed signed last fall with investment advisor Blackrock to manage the distressed assets the Fed acquired from AIG, the hobbled insurance giant. The contract between the NY Fed and Blackrock for managing the CDOs that AIG insured and the Fed took off the banks’ hands is 37 pages. But a good number of those pages are blank –- some 13 page to be exact.

And what is spelled out on these blank pages? Oh, just a few minor details like the fees paid to Blackrock, the firm’s potential CDO conflicts and the firm’s key personnel managing the assets. To be clear, this information isn’t totally secret. All this information has been disclosed to the NY Fed. It’s just that Fed officials have seen fit to keep this information secret from the public.

But if you’re counting on this veil of secrecy to be lifted by the Obama administration when it unveils its regulatory overhaul plan on Wednesday —- think again. The architect of the financial regulatory overhaul is Treasury Secretary Tim Geithner, who just happened to head the NY Fed when these contracts with Blackrock were signed.

Fed Cuts Key Interest Rate to 1 Percent

Saying the economy had slowed markedly, Fed Chairman Ben Bernanke and his colleagues cut their target for a key short-term interest rate to 1 percent this afternoon, the lowest it had been since June 2004. Before then, rates had not been that low since 1958.

Here is the text of the Fed's Statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1%.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

Fed to Consider Dropping Key Interest Rate to 1 Percent

The Federal Reserve may lower its benchmark interest rate to 1 percent today and one expert said eventually, zero percent is not out of the question.

Steve Matthews of Bloomberg writes:

Tumbling commodities prices and weaker consumer spending are slowing inflation, which officials described as a ``significant concern'' at their last scheduled meeting in September. Tomorrow, the Commerce Department will probably report that the economy shrank at a 0.5 percent annual rate in the third quarter, the most since the 2001 recession, economists predict.

The Fed ``will be very aggressive,'' said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. ``Inflation risks are off the table'' and ``the issue now is how bad the recession will be.''

He predicted the benchmark rate will be cut by half a point today, matching the median forecast of economists surveyed by Bloomberg News. Bernanke and his team could push borrowing costs to zero by June if the credit crunch intensifies, Gertler said.

``The predominant concern will be inadequate growth,'' said former Fed Governor Lyle Gramley, now a Washington-based senior economic adviser for Stanford Group Co., a wealth-management firm. ``If the economy shows additional signs of a deepening recession, I think the Fed will decide that the floor is not 1 percent.''

Gramley predicts that policy makers will again cut the main rate by 0.5 percentage point at their next scheduled meeting in December, pushing it toward levels last seen in 1958. ``Zero is a possibility,'' he said.

The dollar fell for a second day against the euro on bets the Fed will lower interest rates more than economists predict. Futures on the Chicago Board of Trade show a 38 percent chance the benchmark rate will be cut to 0.75 percent from 1.5 percent. The odds increased from 34 percent a day before.

European Central Bank President Jean-Claude Trichet said Oct. 27 he may reduce interest rates next week, citing ebbing inflation and ``weakening demand.'' The ECB, Fed and four other central banks trimmed rates by a half point on Oct. 8 in an unprecedented coordinated move.

After the emergency cut, the Fed signaled it may ease again, citing ``weakening of economic activity and a reduction in inflationary pressures.''

The Fed's announcement is scheduled to come at 2:15 p.m. Eastern today.

Fed Leaves Key Interest Rate Unchanged; Dow Continues to Drops

UPDATE 2:45 p.m. Eastern

The Federal Reserve decided this afternoon to keep its federal funds rate unchanged at 2 percent despite the struggling global financial markets.

Scott Lanman and Craig Torres of Bloomberg reports:

"Downside risks to growth and the upside risk to inflation are both of significant concern," the Federal Open Market Committee said in a statement in Washington. "The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy skirting a recession. Stocks fell after the decision, while the dollar gained and Treasuries remained higher.

"Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters," the statement said. "Over time, the substantial easing of monetary policy combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth."

The decision was unanimous, the first such agreement in a year.

The markets and the dollar had turned higher in today's trading as investors were anticipating the Fed would cut interest rates to calm worries related to AIG's financial problems. The Dow Jones Industrial Average was up 19.46 points to 10,936.97 at 2:12 p.m. Eastern. The S&P 500 was up slightly by 0.8 to 1,193.50 at the same time.

But the markets reacted to the Fed's announcement immediately. The Dow fell to 10,826.57 at 2:27 p.m., a 90.94 drop from the opening bell. The S&P 500 fell to 1,180.88 at the same time, a drop of 11.82 from the start of the day.