Fed buys 1 trillion dollars of Treasury, mortgage assets (2nd Roundup)

Mar 18, 2009, 19:28 GMT

Washington - The Federal Reserve, in a drastic new effort to keep the US financial sector afloat, said Wednesday it would buy up more than 1 trillion dollars in Treasury and mortgage-backed securities.

Surprising many analysts, the US central bank's actions dramatically expand the Federal Reserve's balance sheet to nearly 3 trillion dollars and mark one of its most aggressive efforts yet to revive bank lending and end the world's worst financial crisis since the Great Depression.

'In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability,' the Federal Open Market Committee said in a statement.

Major US stock indices rallied more than 2 per cent on Wall Street immediately after the central bank's announcement. The new actions should aid a 'gradual resumption' of economic growth, the statement said.

The Fed said it would buy up to 300 billion dollars in long-term Treasury securities over the next six months, its first investment in the government debt market that has been flooded by investors looking for safe places to store their money in the current climate.

The Fed will also absorb up to 750 billion dollars in mortgage- related assets at the heart of the financial crisis, which could bring its total holdings of mortgage securities to 1.25 trillion dollars.

The central bank's 12-member committee also kept its key interest rate at a record low of 0-0.25 per cent as the United States continues to struggle through a deep recession.

The central bank has held its benchmark federal funds rate at the unprecedented level since December, exhausting its monetary policy options to stem the economic slide. Interest rates would have to remain at bottom for an 'extended period,' the Fed said.

Financial firms have already written off more than 1 trillion dollars in assets related to the collapse of the US housing market, which sparked the wider economic crisis and has already caused dozens of banks to file for bankruptcy.

Economists have warned that the system - either the government or banks - may have to absorb another 1 trillion dollars in losses before the crisis is over.

The Fed's latest actions were possibly buoyed by government inflation figures earlier Wednesday showing consumer prices climbed 0.4 per cent in February, the largest increase in seven months and easing concerns of deflation.

The new cash injections are the latest in a series of complex and innovative lending programmes the Federal Reserve has adopted since the financial crisis exploded on the scene in September with the collapse of Lehman Brothers Holdings.

President Barack Obama's administration has also invested nearly 700 billion dollars in major US banks in an effort to keep them afloat and avoid a collapse of the entire financial system.

Just this month, the central bank and US Treasury Department launched a new 200-billion-dollar facility that will lend directly to consumers and small businesses that have been unable to get loans from banks. The programme could be expanded to 1 trillion dollars.

The Treasury is preparing to launch a separate 1-trillion-dollar public-private partnership that would completely take the mortgage- related assets off of banks' balance sheets.