Knowledge is Power

Fed Keeps Rate as Low as Zero, Says Prepared to Buy Treasuries
2009-01-28 19:16:00.11 GMT
Excerpt of report by Craig Torres

 Jan. 28 (Bloomberg) - The Federal Reserve left the benchmark interest rate as low as zero and said it's prepared to purchase longer-term Treasury securities to resuscitate lending and the economy. The Fed is "prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets," the Federal Open Market Committee said in a statement after meeting in Washington. Chairman Ben S. Bernanke, by making emergency credit programs rather than rates the focus of policy, is quelling some of the panic in markets while failing to revive growth. Falling home prices, rising unemployment and more than $1 trillion in losses and write-downs at global financial institutions are deepening the longest recession since the 1980s. "The focus of the committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level," the Fed said in the statement. Richmond Federal Reserve Bank President Jeffrey Lacker dissented from today's decision.

Pulling Out Stops

The Fed's assets have grown by $1 trillion over the past year under credit programs ranging from $416 billion in term loans to banks to purchases of $350 billion in commercial paper issued by U.S. corporations. The balance sheet will continue to grow under plans announced by the central bank.

"The Fed has pulled out all the stops," Paul McCulley, a managing director and fund manager at Pacific Investment Management Co. in Newport Beach, California, said in an interview before the announcement. "The Fed's mission has to be to bring down private-sector borrowing rates." Bernanke, a scholar of the Great Depression, criticized the Fed in December for failing to stop bank failures that inflamed panic in financial markets during the 1930s. The former Princeton University economist views financial stability as a prerequisite for an economic recovery. The Fed Board has supported bailouts of Bank of America Corp. and Citigroup Inc. by offering a layer of protection against losses on troubled assets. The Federal Deposit Insurance Corp. and U.S. Treasury also back the rescues. "For now, the goal of policy must be to support financial markets and the economy," Bernanke said at the Dec. 1 speech in Austin, Texas. The Fed announced Nov. 25 that it would buy $600 billion in housing agency bonds and mortgage-backed securities they guarantee. The bond purchases will expand money in the banking system. Excess bank reserves averaged $843 billion in the first two weeks of January, an increase from $1.64 billion for the same month a year earlier. Next month, the Fed plans to launch the $200 billion Term Asset-Backed Securities Loan Facility, which will buy bonds backed by newly issued consumer and small-business loans. The program can be expanded to include other assets. There are some signs that the Fed's action has begun to thaw credit markets…

—With reporting by Kathleen Hays and Rhonda Schaffler in New York. Editors: James Tyson, Daniel Moss

To contact the reporter on this story:

Craig Torres in Washington at +1-202-654-1220 or ctorres3@bloomberg.net

To contact the editor responsible for this story:

Chris Anstey at +1-202-624-1972 or canstey@bloomberg.net

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