Fed stakes all on $600bn QE2

THE Federal Reserve is to pump $600bn (£372.6bn) of fresh funds into the US economy in a last-ditch attempt to revive the slowing economy and hasten the pace of recovery in unemployment.

In its second-round of quantitative easing, dubbed QE2, which comes just two years after the central bank first tried to kick-start the economy, the Fed will buy $75bn of longer-term Treasury securities each month for the next eight months, while leaving interest rates at their current record low for an “extended period”.

The $600bn injected into the economy will be topped up by around $250bn of re-invested assets, mainly mortgage-backed securities, from the first tranche of quantitative easing.

The Fed said it hoped that its landmark decision, indicating that quantitative easing has become a regular policy tool, rather than an emergency-only instrument, would “promote a stronger pace of economic recovery.”

It also left open the possibility that the programme could be extended further in future, saying that it would “regularly review” the pace and scale of its asset-buying.

The widely-anticipated buying-spree, which was smaller than some investors had hoped for, saw bond yields rise but the dollar fall as investors feared the policy could see inflation rise and the greenback subsequently devalued.

The Dow Jones Industrial Average edged up 0.24 per cent, to close at 11,215.13, while the S&P gained 0.37 per cent to 1,197.96. In the bond market, 30-year Treasuries saw yields jump 15 basis points to more than 4.07 per cent. Investors had been buying 30-year bonds in anticipation that the Fed would buy the longest-dated bonds. But the Fed said that only four per cent of its purchases would be in the 17 to 30-year range, with most of its buying in the five to six-year range. The dollar reacted similarly, pushing to new lows against the euro, which jumped to a 10-month high of $1.4179.

Capital Economics economist Paul Dales said the lacklustre market reaction indicated that the scale of asst-buying was too small to boost the US economy, where unemployment remains close to 10 per cent, out of its malaise, and warned it could take at least two years for a genuine pick-up in the pace of recovery.

“This is an untested tool. The Fed can’t be seen not to do anything, but is so scared of inflation that it is taking little baby steps rather than significant ones,” he said.