United States Federal Reserve headquarters

The United States Federal Reserve said today that it will spend another $1.2 trillion to stimulate the economy. The Fed’s announcement has already caused stocks and oil prices to rally.

The Fed said in its announcement that it is trying to lower interest rates and contain the recession.

Project lower mortgages

The Fed plans to purchase an additional $750 billion in mortgage-backed securities. It will also double the amount it planned to spend on debt purchases from Fannie Mae and Freddi Mac. That will now cost $200 billion. That move is intended to lower mortgage rates.

Interested in interest

The Fed will also purchase $300 billion in long-term Treasury bonds. That will lower interest rates for the government, which should translate into lower borrowing costs to businesses as well as individuals seeking personal loans.

Market activity

The Fed announcement regarding the Treasury bonds caused oil prices to climb back upward today after the market on oil futures had closed. After-hours electronic trading spiked immediately following the Fed announcement.

Activity on the stock market also rose sharply, and Treasury bond prices were particularly affected.

Following today’s announcement, Treasury bond prices spiked and yields on those bonds declined, as traders anticipated the Fed bond purchases. At 2:30 p.m., 15 minutes after the announcement, the yield on 10-year Treasury bonds had fallen half a percentage point, to 2.53 percent, according to the Washington Post.

Why the change?

U.S. Federal Reserve Chairman Ben Bernanke

The Fed had earlier expressed reluctance to buy Treasury bonds, so many were surprised by the announcement today. In its statement the Fed admitted that they were concerned about the risk of deflation. The Fed also changed its official policy statement.

The statement originally said the Fed expected the economy to recover later this  year. However, in the Fed announcement today it was clear that is no longer the expectation.