WASHINGTON -The Federal Reserve said yesterday that it will deploy an additional $1.2 trillion to try to lower interest rates and stimulate the economy, an aggressive move aimed at containing the recession.
The central bank will increase its purchases of mortgage-backed securities by $750 billion, on top of a previously announced $500 billion. It also will double its purchases of debt in Fannie Mae and Freddie Mac to $200 billion. Those steps are intended to lower mortgage rates - analysts expect the rates will fall 0.25 to 0.50 percentage points as soon as today. The announcement of the previous purchases pushed mortgage rates down a full percentage point.
The national average rate on 30-year fixed mortgages was 5.15 percent yesterday, according to financial publisher HSH Associates. That was up slightly from a day earlier.
The central bank also made clear that it would be able to purchase the majority of new mortgage-backed securities for at least the rest of the year, possibly longer.
The Fed said it will buy $300 billion in long-term Treasury bonds, a step it had considered earlier but had been reluctant to act on. That move will lower long-term interest rates for the U.S. government directly and, Fed officials hope, will indirectly lower borrowing costs for businesses and individuals.
Since the last meeting of the Fed's policymaking arm, "job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," the Federal Open Market Committee said in a statement. "Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment."
"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability," the statement said.
Having cut the interest rate it controls to essentially zero in December, the Fed has had to find other tools to combat the rapidly deepening recession. At its policymaking meeting that ended today, it left that rate at a range of zero to 0.25 percent.
The Fed's moves wrested attention away from bailout and bonus controversies - for the afternoon at least - and drove up stocks. The Dow Jones industrial average closed up 90.88 points to 7486.58. The S&P; 500 finished up 16.23 to 794.35 and the Nasdaq rose 29.11 points to 1491.22.
The sheer magnitude of the Fed's proposal "indicates they have a lot of weapons still in the arsenal," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.
The Labor Department reported yesterday that consumer prices rose in February by the largest amount in seven months as gasoline prices surged and clothing costs jumped the most in nearly two decades.
But the increase appeared to ease many economists' concerns about dangerous price movements in either direction. The recession is expected to dampen inflation for at least the rest of this year, while the slight uptick in prices over the past two months makes the chance of deflation more remote.
Consumer inflation rose 0.4 percent in February, the biggest one-month jump since a 0.7 percent rise in July. Two-thirds of last month's increase, which was slightly more than analysts expected, reflected a big jump in gasoline pump prices.