Transcripts

Federal Reserve Plans To Buy Government Debt

SUSIE GHARIB: Shock and awe today from the Federal Reserve. The central bank surprised the financial markets, announcing it'll buy up to $300 billion in longer-term Treasuries over the next six months. This is the first time in more than 40 years the Fed has purchased government debt. As the Fed wrapped up its two-day policy meeting, it also said it will purchase an additional $750 billion of mortgage-backed securities. Add it all up. The Fed is pumping more than $1 trillion into the economy. It hopes this cash injection will boost the economy, making more money available to consumers and businesses. Scott Gurvey reports on the central bank's big gamble.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Fed is riding to the rescue saying it wants to provide greater support to the mortgage lending and housing markets. The Fed is expanding its mortgage buying program from $600 billion to almost $1.5 trillion. Economist Jim O'Sullivan predicts a dramatic impact.

JAMES O'SULLIVAN, SR. U.S. ECONOMIST, UBS: Of course already the Fed's actions have brought down conforming mortgage rates by about a hundred basis points since November, since they first came out with their mortgage purchase program. Today they stepped up the size of that program and again the initial reaction in the bond market is to drive down yields another 40 or 50 basis points so no question, you're going to see a further significant decline in mortgage rates.

GURVEY: With the Fed funds rate already as low as it can go, pundits predicting what the Fed's open market committee would put in its policy statement today thought the bankers had run out of surprises. Think again. In addition to its mortgage bombshell, the Fed said it wants to improve conditions in private credit markets. So it will buy $300 billion worth of long-term Treasuries over the next six months. Strategist Milton Ezrati sees another home run.

MILTON EZRATI, SR. MARKET STRATEGIST, LORD ABBETT: I think it will make a big difference in the credit markets. It's what the market's been looking for. I actually thought the Fed would hold it, hold their fire and try to keep some powder dry, but evidently they've decided the situation warrants it. And that will have -- make a big difference in these financial markets.

GURVEY: In making these moves, the Fed is in effect printing money and that has caused some to worry about the inflationary dangers down the road. O'Sullivan says the Fed has more important things to worry about in the near term.

SULLIVAN: Perhaps the foreign exchange traders are a little bit more worried about inflation than U.S. Treasury traders are and certainly when you look at U.S. Treasury yields, you don't see evidence of inflation expectations being a problem and of course with the unemployment rate over 8 percent and still moving up, disinflation and deflation seem much more of a risk than inflation despite the Fed's action.

GURVEY: Some day the Fed will have to take action to soak up some of the money it has flooded into the economy. Figuring out when to take that action will be a challenge for the future. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.