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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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