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2009-03-19 - Fed expands rescue with trillion


									Fed expands rescue with trillion-dollar plan
Bank shifts quantitative easing strategy into high gear; will buy $300-billion in
Treasuries, $750-billion of mortgage-backed securities
Kevin Carmichael
March 19, 2009 – The Globe and Mail

The U.S. Federal Reserve is launching a brave      Mr. Bernanke’s version of shock and awe met
new assault on the financial crisis, pledging      with immediate results - all positive.
more than $1-trillion (U.S.) in a bid to lower     The Standard & Poor’s 500 index jumped 2.1
borrowing costs by purchasing market debt,         per cent to 794.35 at the end of trading in New
including government notes.                        York, while Toronto’s S&P/TSX composite
Chairman Ben Bernanke and the nine other           index closed 69.5 points higher at 8,629.1, up
members of the Federal Open Market                 for a seventh session in a row and rising 15
Committee ended a two-day meeting                  per cent during that time.
yesterday with a plan to fight the recession       Perhaps more important to Mr. Bernanke, the
and counter “some risk” of deflation.              yield on 10-year U.S. government debt
Catching many investors by surprise, Mr.           plunged a half a percentage point to 2.51 per
Bernanke and his most senior lieutenants           cent, the biggest dropped since at least
unanimously endorsed an immediate move to          January, 1962, according to Bloomberg News.
quantitative easing, an approach to monetary       If that display of confidence holds, yesterday’s
policy that generally means flooding the           announcement could go down as the day
financial system with new money to stimulate       policy makers finally got the upper hand in the
broad buying and selling.                          struggle with the financial crisis, some
The Fed will do this by purchasing over the        economists said.
next six months as much as $300-billion of         “This is a turning point,” said Mark Chandler,
longer-                                            a fixed-income strategist at Royal Bank of
By becoming a big-time buyer of government         Canada in Toronto.
debt, Mr. Bernanke is betting that he can          “The Fed has shown now that they will do
reduce yields, causing a ripple effect that        whatever is necessary to avoid deflation,” he
sparks demand in an economy that the policy        said.
makers said yesterday “continues to contract.”
                                                   The Fed is resorting to quantitative easing
Weaker yields on relatively safe government        because its benchmark lending rate is already
debt might also stoke demand by causing            near zero, a level at which the federal funds
investors to seek better returns in other assets   rate likely will remain for “an extended
such as corporate debt.                            period,” policy makers said in yesterday’s
The Fed also will expand existing programs         statement.
aimed more directly at mortgage rates. The         While Mr. Bernanke had said he was
U.S. central bank will purchase an additional      considering resorting to buying government
$750-billion of mortgage-backed securities         debt, many economists said they didn’t expect
issued by housing agencies Fannie Mae and          him to move so soon.
Freddie Mac, and another $100-billion of debt
issues by those agencies.                          The U.S. central bank may have been
                                                   encouraged by its counterparts in Britain,
where the Bank of England has successfully         Here’s what some are trying:The U.S. Federal
lowered borrowing costs by purchasing              Reserve
government bonds and corporate debt.               Over the next six months, the Fed will buy up
Japan’s central bank yesterday expanded            to $300-billion (U.S.) of longer-term
purchases of government notes and this week        Treasuries. The Fed also said it will spend an
said it would begin making subordinated loans      additional $750-billion on mortgage-backed
to banks.                                          securities issued by Fannie Mae and Freddie
                                                   Mac and another $100-billion (US) on debt
The rush to quantitative easing increases the
                                                   issued by those agencies. The Bank of Japan
odds that the Bank of Canada will follow suit,
economists said.                                   The Japanese central bank says it will buy
                                                   ¥1.8-trillion of government debt each month,
Earlier this month, Governor Mark Carney
                                                   up from a previous commitment of ¥1.4-
reduced Canada’s benchmark interest rate to
                                                   trillion. Japanese policy makers also said this
0.5 per cent and said that he would present a
                                                   week they will offer banks as much as ¥1-
potential quantitative easing strategy when the
                                                   trillion in subordinated loans.
central bank publishes its next quarterly report
on April 23.                                       The Bank of England
“The prospect of the Bank of Canada actually       Chancellor of the Exchequer Alistair Darling
going forward with credit and quantitative         has given the central bank authority to buy as
easing has increased substantially now that the    much as £150-billion of assets with newly-
theories have been successfully tested in          created money. The central bank plans to
several countries,” Eric Lascelles, an             spend most of the first sum of £75-billion on
economist at Toronto-Dominion Bank, said in        gilts.
a report yesterday.
                                                   The Bank of Canada
Central Bank Initiatives                           Governor Mark Carney is developing a
With benchmark lending rates near zero,            quantitative easing plan, which the central
central banks are now trying to lower credit       bank intends to release in its next quarterly
rates by printing money, a strategy called         economic report on April 23.
alternatively quantitative or credit easing.

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