Fed Plans to Pump $1.2 Trillion into Economic Recovery

The Federal Reserve launched a plan yesterday to help the U.S. economy recover, attempting to do so with a mix of lowering mortgage rates, making consumer debt more available and encouraging spending. The Fed will buy $300 billion in long-term government bonds as well as $750 billion in mortgage-backed securities that will be guaranteed by Fannie Mae and Freddie Mac. Fed Chairman Ben Bernanke and the other members of the Federal Open Market Committee decided to keep short-term interest rates at .25%, a rate that many economists predict will prevail throughout 2009 and most of 2010.

Terry Connelly, dean of Golden Gate University Ageno School of Business, speaking of the Fed’s move to put so much money into the economy, noted, "The Fed is clearly ready, willing and able to be the ATM for the credit markets." After the move was announced, Wall Street reacted as expected, with the Down rising 1.2% in the wake of the announcement. 10-year Treasury notes, those most closely tied to 30-year mortgage rates, dropped from 3.01% to 2.50%, the largest drop since 1981.

By encouraging growth in the short term, the Fed hopes to end the current recession some time in 2009, leading to a full recovery in 2010. Sung Won Sohn, an economist at the Martin Smith School of Business, noted, "This is going to help everybody. This might help the Fed put Humpty Dumpty back together again." Speaking on the issue of mortgage rates, Greg McBride, of Bankrate.com, noted, "This is not only going to keep mortgage rates low for a long period of time. The mere announcement may produce a honeymoon effect and bring mortgage rates down to even lower levels in the coming days."