- The Washington Times - Wednesday, March 18, 2009

The Federal Reserve announced Wednesday afternoon that it will seek to dramatically lower the rates on mortgages and other long-term loans by purchasing Treasury bonds as well as mortgages.

The massive $1 trillion expansion of the Fed’s program for buying long-term debt provoked an immediate drop in the yields on Treasury securities. The rate on Treasury’s 10-year bond fell to 2.54 percent from nearly 3 percent earlier in the day.

The Fed said it would buy another $750 billion in mortgage-backed securities from Fannie Mae and Freddie Mac, and purchase $300 billion of Treasury bonds in the next six months — a move that not only will influence rates on all types of loans but helps the federal government finance a budget deficit expected to reach close to $2 trillion this year.

While announcing dramatic new actions targeting long-term rates, the Fed in a statement said it also is keeping its target for short-term interest rates near zero to help bring the economy back from a deep recession.


“The economy continues to contract,” said the Fed. “Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.” And the recession has spread to the rest of the world, affecting all U.S. trading partners, it noted.

The central bank said that the extremely weak economy has kept inflation at bay, and it expects that continue until the economy recovers.

Critics are likely to point out, however, that because the Fed must print money to purchase Treasury bonds and mortgage securities, its actions raise the potential for inflation problems in the future once the economy recovers.