Federal Reserve ends suspense with $600 billion QE2 package

fiscal stimulas headquarters

In a move everyone was waiting for Wednesday, the Fed announced QE2 -- printing money to buy $600 billion in Treasurys -- an effort to stimulate the sluggish economy. Image: CC NC in DC/Flickr

Just about everyone knew the Federal Reserve would launch another round of quantitative easing after the midterm elections. What wasn’t known was just how much quantitative easing the Fed was going to launch. The suspense ended Wednesday when the Fed announced it would buy $600 billion in Treasury bonds between now and June 2011.

The Fed’s big bond purchase

The Federal Reserve hopes to jolt the sluggish economy into recovery by pumping billions of dollars into the financial system. In an effort regarded as bold, risky and unconventional, the Fed will start printing money to buy $600 billion in Treasurys. In theory, the second round of a fiscal stimulus called quantitative easing, or QE2, will lower interest rates on long-term loans, stimulate consumer spending and reinvigorate hiring. The total QE2 package could add up to $900 billion as the Fed buys even more Treasurys with $300 billion it plans to make from mortgage portfolio investments.

Markets react strangely to QE2

QE2 was no secret, but the Fed’s move, in its depth and breadth, was bolder than most analysts had anticipated. Even so, in the financial markets, which had been pricing in an even bigger Fed bond purchase, interest rates surprisingly rose following the QE2 announcement. The yield on 30-year Treasury bonds was up 0.17 points to 4.09 percent. Ten-year Treasury bonds rose 0.04 points to 2.6 percent. The stock market also favored the news. The Standard & Poor’s 500 index was up 0.2 percent.

Fed has no faith in Congress

A few months ago the Fed considered a return to normal monetary policy, which has been customary following a recession. That would include raising interest rates and tightening credit. However, the possibility of continued political gridlock based on the outcome of the midterm elections convinced Fed chairman Ben Bernanke to act. Because the Fed can’t count on Congress to do anything to stimulate the economy, Bernanke has said, he will use all the tools at his disposal to stimulate employment and get the economy back on track.

Sources

New York Times

Washington Post

USA Today

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