Transcripts

The Fed Shifts From Interest Rates To Treasuries

SUSIE GHARIB: An unusual policy decision from the Federal Reserve today, the central bank did not cut rates because they're already as low as they can go: near zero. But the Fed detailed additional steps it could take to stabilize the credit markets, including the possibility of buying longer-term Treasuries. Today's Fed announcement gave a boost to the stock market as all the major indexes rallied. As Suzanne Pratt reports, the Fed continues to show its creativity as it tries to repair the economy.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here's a riddle for the Federal Reserve. How do you lower borrowing costs for households and businesses if short-term interest rates are already at zero? Fed Chairman Ben Bernanke and company said today the answer can still be found in their tool box. No, not this tool box. The metaphorical Fed tool box which now includes unprecedented credit programs, such as the purchase of mortgage-backed securities. That's something the Fed began doing with some success earlier this month. In today's statement, policymakers said they would expand those purchases if needed. And more importantly, they're prepared to buy long-term Treasuries. Economist Anthony Chan said the Fed's comments should be comforting to financial markets.

ANTHONY CHAN, CHIEF ECONOMIST, J.P. MORGAN PRIVATE CLIENT SERVICES: I think what the Fed said today is exactly what we wanted the Fed to say and that is they won't stand down. Ben Bernanke certainly kept his word. He is continuing to try to address the situation head on.

PRATT: As is usually the case with its policy statement, the Fed also gave a synopsis of the state of the economy. It reminded financial markets that economic conditions have weakened further since its December meeting and that the credit environment remains extremely tight. The Fed also said there's a risk inflation could fall too low, underscoring fresh concerns about deflation. Economist Josh Feinman says while deflation is a short- term risk, it's unlikely to be a long-term problem.

JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MGMT: I would draw an important distinction between a temporary period where you print very low or even negative inflation and the kind of deflationary psychology that where it gets imbedded in people's expectations. They think prices are going to keep falling and that become self-reinforcing.

PRATT: Most economists agree the Fed will keep short-term interest rates effectively to zero for all of this year and maybe well into next year. Before upping rates, policymakers will need to be confident that the credit system has healed and that the economy is back on its feet. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.