New York/London: The US Federal Reserve on Wednesday stunned markets by announcing it would pump another $1 trillion into the ailing US economy by buying long term government debt for the first time since the 1960s and by expanding its purchases of mortgage bonds.
The Fed had already lowered its benchmark interest rate to near zero 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 US government debt over the next six months and expand its existing program to buy mortgage related securities by another $850 bln to $1.45 trillion this year.
US home mortgage rates fell toward record lows around 5% 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.”
US benchmark stock indexes surged on the Fed news with the Dow Jones industrial average closing 1.2% higher on the day. US Treasury bond yields saw their biggest one day drop in yields since the 1987 stockmarket crash, with the benchmark 10 year yield last trading at around 2.50%.
Meanwhile the US Congress was grilling the chief executive of insurer AIG over the payment of retention bonuses to key staff, in the wake of the third US 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 US Treasury’s and US Federal Reserve’s programs to buy toxic assets from banks and to boost consumer and business lending, analysts said.
A world of weakness
Earlier on Wednesday, 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.
European shares fell, with the pan-regional FTSEurofirst 300 closing down 0.7% and Britain’s FTSE 100 falling 1.4%.
“There is no hiding place and they need to do everything within their power to get the economy moving. Hopefully we won’t be talking about 3 million out of work in 12 months time,” said Rob Pike, head of trading at Shortsandlongs.com.
In the United States, government data showed the US current account for the fourth quarter of 2008 narrowing sharply and by more than expected to $132.8 billion, the smallest since 2003 and a reflection of a plunge in trade across the world.
Earlier the Bank of Japan also surprised markets by raising annual government bond purchases by 29% to a record $219 billion to ”smooth market operations.” The move was more than analysts had expected and sooner than many had anticipated.
As world political leaders prepare for a G20 summit to help coordinate their efforts to overcome the crisis, Japan’s leadership has been accused of sluggishness in intervening to revive money supply to feed industry and trade.
“Today’s announcement shows the BOJ is doing more than what the markets expected to strengthen monetary easing,” said Junko Nishioka, chief Japan economist at RBS.
While the Bank of Japan has been buying government debt for decades, other central banks have only started considering such an operation after pushing interest rates near to zero.
The Bank of England started buying government bonds with newly created money on March 11 and the Federal Reserve has mentioned such a scheme as a step it could take in the face of the worst global downturn since the 1930s.