Thursday, 29 January, 2009
Use of unconventional ways to prop up lending will grow, Reserve says.
Conceding that the economy is still spiraling downward on most fronts, the Federal Reserve signaled Wednesday that it would expand its use of unconventional measures to directly prop up lending for mortgages, consumer loans and businesses. "The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said in its statement.
Investors showed little reaction to the Fed's unsurprising assessment. But financial stocks did lead Wall Street sharply higher Wednesday on hopes the Obama administration will create banks to absorb the bad assets weighing down the financial system. The Standard & Poor's 500 index, a benchmark for the overall stock market, completed its first four-day rally since late November.
The S&P 500 index jumped 28.38, or 3.36 percent, to 874.09. The index last recorded as many straight advances in a five-day run that ended Nov. 28. The Dow industrials rose 200.72, or 2.46 percent, to 8,375.45, while the Nasdaq composite index rose 53.44, or 3.55 percent, to 1,558.34.
The Federal Reserve has already been buying mortgage-backed securities and it said Wednesday in its statement that it would expand its intervention as needed. The committee also served notice that it would purchase longer term Treasury bonds, a move that would drive down long-term interest rates of all types. And it expressed its most pointed concern so far that deflation could be a problem, and it saw "some risk" that price inflation remained uncomfortably low.
The Fed expects the economy to continue shrinking through at least the first six months of 2009. In the next several weeks, the Fed expects to start a $200 billion program that would finance securities backed by consumer loans, including car loans and credit card debt. Earlier this month, the Fed started buying $500 billion in mortgage-backed securities.
Since September, the central bank has used its authority to create more than $1 trillion out of thin air, more than doubling the size of its balance sheet from about $900 billion in September to just over $2 trillion as of last week. But Fed officials have acknowledged for weeks that the economy contracted sharply in the fourth quarter. Employers, who had been shedding about 80,000 jobs a month from January through August, eliminated an average of 500,000 jobs a month from September through December.
To push down interest rates on mortgages, the central bank began a program earlier this month to buy $500 billion in mortgage-backed securities issued by Fannie Mae, Freddie Mac and the federal agencies. Thus far, the Fed has bought about $53 billion, and rates dropped sharply and stayed low as soon as the Fed announced plans for the program in late November.
Source: http://www.detnews.com/
