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The Federal Reserve announced Wednesday that it will devote another $1.2 trillion to unfreeze credit markets and help stimulate the sluggish economy. Greg Ip of The Economist provides details on the move.
Ray Suarez has our Fed story.
While most attention in Washington today was focused on the way taxpayers' money had already been spent, the Federal Reserve committed itself to big new spending.
The Fed's Board of Governors announced they would pump more than $1 trillion additional dollars into the economy, including $750 billion to purchase mortgage-backed securities and as much as $300 billion in long-term government bonds.
To help explain what's behind the latest decisions, we're joined again by Greg Ip, U.S. economics editor for the Economist.
And one Wall Street trader today, Greg, right after the move, said, "Well, they found out incrementalism didn't work. Now they're trying shock and awe." Is this that big a move on the part of the Fed?
GREG IP, The Economist:
It's a very big move. And, yes, it is shock and awe. Now, the only thing that tempers my enthusiasm a little bit is that this is at least the third round of shock and awe we've had from this Fed since this crisis began in 2007.
And what that tells you is that they've had to basically step up the intensity of their tactics because of the growing depth of the recession and how serious the problems are out there.
So it's broken into two parts, one, buying mortgage-backed securities.
The other, buying Treasury securities. What's the difference between those two pieces? And what do they do?
OK, well, I'll step back a little bit. Traditionally, the Federal Reserve will influence the economy by raising or lowering the very short-term interest rate. But in December, that rate basically fell to zero, so they are out of conventional ammunition.
So they said, well, how else can we stimulate the economy? Perhaps we can improve the supply of credit. There's a lot of people who can't get mortgages, so purchasing mortgage-backed securities helps on that front.
The other thing that happens is that, when they buy long-term mortgage-backed securities, it lowers mortgage rates, more people can qualify for mortgages, might be willing to buy homes, and buying Treasuries does the same thing. When you buy a lot of Treasury bonds, the price goes up and the rate on the bonds goes down. That lowers long-term borrowing costs for everybody.
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