NEW YORK/LONDON, (Reuters) – The U.S. Federal Reserve yesterday stunned markets by offering to buy Treasury bonds for the first time since the 1960s and expand its purchases of mortgage bonds by another $850 bln to restart shattered credit markets and kick start the economy.
The Fed had already exhausted its main monetary policy tool by cutting the benchmark interest rate to between zero and 0.25 percent last December, leaving it little option but to follow Japan and Britain in pumping money directly into the economy.
In its surprise move, the Fed said it would buy up to $300 billion of longer term U.S. government debt over the next six months and expand its existing programme to buy mortgage related securities by another $850 bln to $1.45 trillion this year.
U.S. home mortgage rates fell toward record lows around 5.00 percent after the Fed’s announcement.
“This is a pretty dramatic move,” said James Caron, head of global rates research at Morgan Stanley in New York. “They are trying to bring down all consumer rates.”
U.S. benchmark stock indexes <.SPX> <.IXIC> surged on the Fed news with the Dow Jones industrial average <.DJI> closing 1.2 percent higher on the day. U.S. Treasury bond yields saw their biggest one day drop in yields since the 1987 stock market crash, with the benchmark 10 year yield last trading at around 2.52 pct.
Meanwhile the U.S. Congress was grilling the chief executive of insurer AIG over the payment of retention bonuses to key staff, in the wake of the third U.S government bail out of the systemically important financial conglomerate in the past six months.
The political firestorm over the payment of $165 million in bonuses to AIG staff was deterring investors from participating in the U.S. Treasury’s and U.S. Federal Reserve’s programs to buy toxic assets from banks and boost consumer and business lending, analysts said.
Earlier yesterday, European Central Bank President Jean-Claude Trichet said the ECB was ready to take additional measures to tackle the global economic crisis even as he suggested a recovery could be in sight.
“The year 2009 will be very, very difficult,” Trichet told Europe 1 radio. “At the same time, there is quite general agreement between all public and private institutions that 2010 may be the year of moderate recovery in growth.”
Underlying economic figures remained grim.
Britain registered February unemployment over two million for the first time since 1997, reinforcing fears the country’s downturn could be worse than previously thought. The number of people claiming jobless benefit rose in February by the biggest amount on record, official data showed.