Federal Reserve to buy Treasuries to boost economy

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.

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