Fed To Boost Economy By Buying $600B In Bonds

The Federal Reserve said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth. The Fed left open the possibility of doing more if growth and inflation don’t perk up in the months ahead. The $75 billion a month in new purchases of Treasury debt come on top of $35 billion a month the Fed is expected to spend to replace mortgage bonds in its portfolio that are being retired. The U.S. central bank said it would buy about $75 billion in longer-term Treasury bonds per month. It said it would regularly review the pace and size of the program and adjust it as needed depending on the path of the recovery. In its post-meeting statement, the Fed described the economy as “slow”, and said employers remained reluctant to add to payrolls. It said measures of inflation were “somewhat low.”

Friday, October 15, 2010, Federal Reserve Chairman Ben S. Bernanke sent a strong signal that the central bank is gearing up for a major new attempt to jolt an economy that is at risk of getting stuck in an entrenched pattern of sluggish growth. The Dow Jones Industrial Average Wednesday continued a climb that began in August, when Mr. Bernanke signaled that a bond-buying program was possible. The index rose 26.41 points, or 0.24%, to a two-year high of 11215.13. Yields on 10-year notes, which have fallen from just under 3% in early August, finished the day at 2.62%. The value of the dollar has fallen in anticipation of a flood of new American currency hitting global financial markets. These market reactions are seen inside the Fed as being stimulative to the economy. In addition to the impact of cheaper borrowing, higher stock prices could encourage households to spend more and businesses to invest more, and a weak dollar could make U.S. exports cheaper and thus easier to sell abroad.

The Fed now will print money to buy as much as $900 billion in U.S. government bonds through June—an amount roughly equal to the government’s total projected borrowing needs over that period.

The budget deficit was $1.29 trillion in the fiscal year ended Sept. 30, the government said Friday, the second largest shortfall relative to the size of the economy since World War II. The 2009 fiscal year budget deficit was larger, both in absolute terms (at $1.4 trillion) and relative to the size of the economy. The lower deficit was due to higher tax revenue generated by the somewhat improved economy and lower costs from the financial bailout and other emergency measures.

Inflation remains exceptionally low, which Bernanke characterized as the major reason the Fed may take new action. The Labor Department said that consumer prices rose only 1.1 percent over the past year, or 0.8 percent when the volatile food and energy segments are excluded.

The news on consumer prices was followed Friday by an announcement from the Social Security Administration that recipients of the government social insurance program will not get a cost-of-living increase in 2011, the second year in a row. Federal rules say that consumer prices must rise past their level when the last Social Security increase was awarded for higher benefits to take effect. The last price increase was in 2008, and Friday’s numbers did not surpass that.

In normal times, a Fed spending spree on government bonds would be highly inflationary, because it would flood the economy with money and raise worries about too much government spending. The mere worry of too much inflation in financial markets could drive long-term interest rates higher and cause the Fed’s program to backfire.

Prices in commodities markets have marched higher since late August. Crude-oil futures prices, for instance, have risen 15% since then, to $85 per barrel.

Fed officials are betting that inflation is still being pushed strongly in the other direction because there is so much spare capacity in the economy—including an unemployment rate at 9.6%, a real-estate landscape littered with more than 14 million unoccupied homes, and manufacturers operating with 28% of their productive capacity going unused. The latest economic data suggest the economy is expanding, but not at a very fast pace. Figures Wednesday from payroll firm Automatic Data Processing Inc. and consultancy Macroeconomic Advisers showed that companies added 43,000 private-sector jobs in October.

In a post-meeting statement, the Fed said it was acting to “promote a stronger pace of economic recovery” and to ensure that inflation, now running at around a 1% annual rate, moves toward the Fed’s informal objective of 2%. By buying a lot of bonds and taking them off the market, the Fed expects to push up their prices and push down their yields. The Fed hopes that will result in lower interest rates for homeowners, consumers and businesses, which in turn will encourage more of them to borrow, spend and invest. The Fed figures it will also drive investors into stocks, corporate bonds and other riskier investments offering higher returns.

The Fed normally would push down short-term interest rates when the economy is weak. But it has already pushed those rates to near zero, leaving it to resort to unconventional measures. The planned bond buying, by Fed calculations, will have an economic impact roughly equivalent to cutting short-term interest rates by three-quarters of a percentage point. The Fed will be buying bonds with maturities of as long as 30 years, but will concentrate its purchases in the five-year to six-year range. Some bond-market participants were disappointed with that decision because they wanted the Fed to focus on buying longer-term bonds. But doing so could leave the Fed more exposed to losses if interest rates rise.

A weaker dollar isn’t in U.S. interests, and that a swift decline in the value of the currency could drive up U.S. interest rates. Fed officials have seen the dollar’s drop to date as being orderly and supportive of growth.

Some critics also argue that by purchasing government bonds, the Fed is taking pressure off the White House and Congress to address long-term deficit problems, but Mr. Bernanke is trying to avoid such political calculations. U.S. trading partners, particularly in the developing world, openly worry that the Fed’s money pumping is creating inflation in their own economies and a risk of asset-price bubbles. Fed officials say a strong U.S. economy is in everyone’s interest. In recent weeks, China, India, Australia and others have pushed their own interest rates higher to tamp down inflation forces. Authorities in Brazil and Thailand have imposed taxes on capital flooding into their economies to prevent an asset bubble. And Japanese authorities have intervened in currency markets to prevent the yen from appreciating too much against the dollar.

TROUBLED ASSET RELIEF PROGRAM

Financial rescue plan aimed at restoring liquidity to the financial markets

Program Committed Invested Description
American International Group 

$70 billion $69.8 billion $40 billion in preferred shares were converted to so-called non-cumulative shares that more closely resemble common stock. Treasury later offered another $30 billion in preferred shares for up to 5 years, in return for a 10% dividend. 

Asset Guarantee Program 

  • Citigroup
  • Bank of America
$12.5 billion 

  • $5 billion
  • $7.5 billion
$5 billion 

  • $5 billion
  • $0
Funds set aside to backstop potential losses to government from Citigroup and Bank of America loans.
Auto Supplier Support Program 

  • GM Supplier Receivables
  • (paid back)
  • Chrysler Receivables
$5 billion 

  • $3.5 billion
  • ($140 million)
  • $1.5 billion
$3.5 billion 

  • $2.5 billion
  • ($140 million)
  • $1 billion
Program to help stabilize auto suppliers by guaranteeing debt owed to them for shipped products, and providing financing to continue operations. 

Automotive Industry Financing Program 

  • General Motors
    (paid back)
  • Chrysler
    (paid back)
  • GMAC
  • Chrysler Financial
    (paid back)
$80.1 billion 

  • $49.9 billion
    ($361 million)
  • $15.2 billion
    ($280 million)
  • $13.5 billion
  • $1.5 billion
    ($1.5 billion)
$77.6 billion 

  • $49.9 billion
    ($361 million)
  • $12.8 billion
    ($280 million)
  • $13.4 billion
  • $1.5 billion
    ($1.5 billion)
Program that provides capital on a case-by-case basis to systemically significant auto and auto-financing companies that are at substantial risk of failure. 

Capital Purchase Program 

$218 billion 

($96.2 billion)

$204.7 billion 

($96.2 billion)

Preferred investments in banks to prop up capital reserves and encourage lending, in return for dividend payments and stricter executive compensation requirements. 

Consumer and Business Lending Initiative 

  • TALF investment
  • Small business loan program
  • TALF loss provisions
$70 billion 

  • $20 billion
  • $15 billion
  • $35 billion
$20 billion 

  • $20 billion
  • $0
  • $0
Programs to support private lending purchases of toxic assets and backing SBA loans. Also sets aside funds to backstop potential losses to government from purchases of mortgage-backed securities and other securities backed by consumer loans.
Making Home Affordable 

$50 billion $27.4 billion Multipronged foreclosure prevention plan to help as many as 9 million borrowers by modifying or refinancing loans. 

Public-Private Investment Program $100 billion $26.7 billion Taxpayer funds used in partnership with private investment that will buy up at least $500 billion of toxic assets from financial institutions. 

Targeted Investment Program 

  • Citigroup
  • (paid back)
  • Bank of America
$40 billion 

  • $20 billion
  • ($20 billion)
  • $20 billion
$40 billion 

  • $20 billion
  • ($20 billion)
  • $20 billion
Emergency funding, in addition to previous $25 billion capital investments, for Citigroup and Bank of America 

Funds paid back ($118.5 billion) ($118.5 billion)
New initiatives $172.9 billion n/a
TARP total $700 billion $356.2 billion

FEDERAL RESERVE RESCUE EFFORTS

Financial rescue plan aimed at restoring liquidity to the financial markets.

Program Committed Invested Description
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility Unlimited $0 million Financing to banks for purchases of three-month asset-backed commercial paper from money market mutual funds to promote money market liquidity.
Bank of America loan-loss backstop $97 billion $0 Funds set aside to insure against bank’s potential losses from Merrill Lynch merger.
Bear Stearns bailout $29 billion $26.3 billion Program to guarantee potential losses on Bear Stearns’ portfolio; smoothed the way for JPMorgan Chase to buy the failed investment bank. 

Citigroup loan-loss backstop $220.4 billion $0 Funds set aside to insure against bank’s potential losses from mortgage-backed securities investments.
Commercial Paper Funding Facility $1.8 trillion $14.3 billion Purchases of short-term corporate debt aimed at boosting the struggling market and providing critical three-month financing to businesses. 

Foreign exchange dollar swaps Unlimited $29.1 billion Exchange of dollars to 13 foreign central banks for collateral. Aim is to provide liquidity to foreign financial institutions. 

GSE debt purchases $200 billion $149.7 billion Program to buy debt issued by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans. 

GSE mortgage-backed securities purchases $1.25 trillion $775.6 billion Program to buy mortgage-backed securities held by Fannie Mae and Freddie Mac. Aim is to reduce rates on home loans.
Money Market Investor Funding Facility $600 billion $0 Programs to help money market funds by lending to funds directly.
Primary Dealer Credit Facility n/a $0 Long-time lending facility for commercial banks that was opened to investment banks for first time in March 2008.
Term Asset-backed securities Loan Facility $1 trillion $43.8 billion Program to buy consumer loan-backed securities. Aim is to revive the securitization market for consumer loans like credit cards and auto loans. 

Term Auction Facility $500 billion $109.5 billion Lending program that allows commercial banks to unload hard-to-sell assets, including mortgage-backed securities: Fed takes assets as collateral and banks get cash. 

Term Securities Lending Facility $250 billion $0 billion Federal Reserve facility that loans Treasurys to banks against hard-to-sell collateral like mortgage-backed securities.
U.S. government bond purchases $300 billion $295.3 billion Federal Reserve will buy up to $300 billion of U.S. debt to support Treasury market and help keep interest rates down for consumer loans.
Fed total $6.4 trillion $1.5 trillion

FEDERAL STIMULUS PROGRAMS

Programs designed to save or create jobs and jumpstart the economy from recession.

Program Committed Invested Description
Economic Stimulus Act of 2008 

  • Rebates for individuals
  • Tax breaks for businesses
$168 billion 

  • $117 billion
  • $51 billion
$168 billion 

  • $117 billion
  • $51 billion
Refundable tax rebates of up to $600 for individual filers and $1,200 for couples in effort to boost the economy. Businesses also received tax breaks. 

Unemployment benefit extension $8 billion $8 billion Federal funds to extend benefits for the unemployed. 

Student loan guarantees $195 billion $32.6 billion Program to purchase federal student loans from private lenders. Aim is to provide financing to companies that provide student loans.
American Recovery and Reinvestment Act 

  • Tax relief
  • Stimulus
$787.2 billion 

  • $288 billion
  • $499.2 billion
$358.2 billion 

  • $62.5 billion
  • $295.6 billion
Infrastructure spending, funding for states, help for the needy and tax cuts for individuals and businesses to stimulate the economy. 

Advanced Technology Vehicles Manufacturing program $25 billion $8 billion Energy Department loans to help auto manufacturers and parts suppliers create new fuel-efficient vehicles. The funds are awarded through a competitive process to companies that can increase fuel standards at least 25% beyond 2005 levels.
Car Allowance Rebate System (“Cash for Clunkers”) $3 billion $3 billion Rebate program that gives car buyers up to $4,500 for trading in qualifying gas-guzzling vehicles if they’re buying more fuel efficient cars.
Stimulus total $1.2 trillion $577.8 billion

AMERICAN INTERNATIONAL GROUP

Multifaceted bailout to help insurer through restructuring, minimize the need to post collateral and get rid of toxic assets

Program Committed Invested Description
Asset purchases 

  • Collateralized debt obligation purchases
  • Mortgage-backed securities purchases
$52.5 billion 

  • $30 billion
  • $22.5 billion
$38.6 billion 

  • $22.9 billion
  • $15.7 billion
$30 billion from New York Fed for purchasing clients’ collateralized debt obligations and $22.5 billion for purchasing clients’ mortgage-backed securities.
Bridge loan $25 billion $44 billion Loan to be reduced from $60 billion to $25 billion as government takes shares in AIG subsidiaries and receives cash flows from life insurance policies. AIG must pay 3% plus 3-month Libor rate to government in interest on the 5-year loan.
Government stakes in subsidiaries $26 billion $0 Government to hold preferred interest in entities holding all the common stock of American Life Insurance Company and American International Assurance Company, two life insurance holding company subsidiaries of AIG.
TARP investment $70 billion $44.8 billion $40 billion in preferred shares were converted to so-called non-cumulative shares that more closely resemble common stock. Treasury later offered another $30 billion in preferred shares for up to 5 years, in return for a 10% dividend.
Other $8.5 billion $0 Government giving AIG $8.5 billion and, in exchange, is receiving cash streams from the premiums of blocks of life insurance policies.
AIG total $182 billion $127.4 billion

FDIC BANK TAKEOVERS

Cost to FDIC fund that insures losses depositors suffer when a bank fails.

Program Cost to fund
2008 FDIC bank takeovers $17.6 billion
2009 FDIC bank takeovers 

$27.8 billion
FDIC total $45.4 billion

OTHER FINANCIAL INITIATIVES

Other programs designed to rescue the financial sector

Program Committed Invested Description
Credit union deposit insurance guarantees $80 billion $0 Temporary guarantee of all corporate credit union deposits above former $250,000 limit.
Money market guarantee program $50 billion $0 Treasury program to help money market funds by insuring against losses. 

NCUA bailout of U.S. Central and WesCorp credit unions $57 billion $57 billion Cost to NCUA credit unions, with backing of government, to place two troubled credit unions into conservatorship
U.S. Central Federal Credit Union investment $1 billion $1 billion Cost to NCUA credit unions, with backing of government, to help troubled credit union cover anticipated losses on asset-backed securities.
Temporary Liquidity Guarantee Program $1.5 trillion $308.4 billion Guarantees on newly issued bank bonds backed with assets on company balance sheets with maturities of more up to ten years. Aim is to restore liquidity to the corporate bond market and provide long-term financing to banks. 

Other financial total $1.7 trillion $366.4 billion

OTHER HOUSING INITIATIVES

Other programs designed to rescue the housing market and prevent foreclosures

Program Committed Invested Description
Fannie Mae and Freddie Mac bailout 

  • Fannie Mae
  • Freddie Mac
$400 billion 

  • $200 billion
  • $200 billion
$110.6 billion 

  • $59.9 billion
  • $50.7 billion
Cost to the government of taking the mortgage finance companies into conservatorship. 

FHA housing rescue $320 billion $20 billion Funding set aside for insurance of new 30-year fixed-rate mortgages for at-risk borrowers, tax credits for first-time home buyers and assistance to states and municipalities. 

Making Home Affordable investment $25 billion $0 $20 billion from GSEs and $5 billion from HUD to help Treasury launch its $75 billion multipronged foreclosure prevention plan.
Other housing total $745 billion $130.6 billion
Total $11 trillion

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