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U.S. Central Bank Announces New Economic Stimulus

The U.S. Federal Reserve has announced a plan to buy hundreds of billions of dollars worth of U.S. Treasury bonds.
The U.S. Federal Reserve has announced a bold plan to buy hundreds of billions of dollars worth of U.S. Treasury bonds in a move meant to speed up the country's financial recovery.

The Federal Reserve's policy-setting committee announced today that the bank would purchase an additional $600 billion in government bonds by the middle of next year, further driving down interest rates on mortgages and other debts.

The intended effect is to provide people and companies with cheaper loans, and encourage them to borrow and spend. It's hoped that this will energize the sagging economy and prompt companies to hire new workers.

With the U.S. unemployment rate close to 10 percent, the Federal Reserve has been under pressure to take steps that will speed the recovery from the recent recession. In a statement announcing today’s decision, the bank said “progress...has been disappointingly slow.”

The U.S. economy grew at a 2 percent annual rate in July-September, slightly more than during the year's second quarter. Economists say the economy must grow at about 3 percent for a sustained period for the level of unemployment to drop.

Financial markets had been anticipating the Federal Reserve's move for weeks, and by the end of trading today, the U.S. Dow Jones industrial average had risen up to reach a new high mark for the year, 11,215. Oil prices also received a boost.

It was the second day of gains after investor confidence rose on Election Day (November 2), in anticipation that the Republican Party would do well in national midterm elections. Some view the party as more friendly to business, and the sluggish economy was the central issue on the minds of most voters.

Stimulus Skepticism

The purchase of huge quantities of bonds is not unprecedented, as the Federal Reserve bought some $1.7 trillion in mortgage-linked bonds and government debt at the height of the recession in 2009. That move is credited with helping lift the country out of crisis.
U.S. Federal Reserve Chairman Ben Bernanke

But economists point out that this is the first time the bank has done so at a time when the economy is merely slow rather than in an emergency situation.

Critics both inside and outside the Federal Reserve say that the plan is a high-stakes gamble, in that if it works, it could touch off a round of fierce inflation. If it doesn't work, they say it is sure to damage the credibility of the bank.

Some also argue that although the pace of recovery is slow, markets should be allowed to regroup on their own.

One member of the bank's policy-setting committee voted against the move over concerns that the risks outweighed the benefits.

The new policy will have international repercussions. With the Fed determined to keep interest rates down, investors are expected to continue to flee what they see as the prospect of a long period of ultra-low returns in the United States.

Investors have gone mostly to promising emerging markets like Brazil and India, with the result that their currencies have been pushed higher against the dollar, blunting their competitive edge as exporters.

This has led to complaints by the countries involved, and has added to fears of a possible currency war involving competitive devaluations.

The European Central Bank, the Bank of England, and the Bank of Japan are all scheduled to hold meetings this week to weigh adjustments to their own policies in response to the U.S. move.

written by Breffni O'Rourke and Richard Solash with agency reports
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