US to buy $600bn in Treasury debt to shore up economy

The Fed's top policy-making panel cast aside its long-held reluctance to micro-manage the economy in a bid to avoid a lost decade of growth and reduce unemployment.

WASHINGTON // The Federal Reserve on Wednesday agreed to pour an additional US$600 billion into the US economy, a bold move to ease crushing unemployment.

The Fed's top policy-making panel cast aside its long-held reluctance to micro-manage the economy in a bid to avoid a lost decade of growth, in a move that redefines the central bank's role.

The Federal Open Market Committee (FOMC) said it would buy up Treasury debt at a rate of around 75 billion dollars a month, a scale not seen since the depths of the economic crisis.

While the Fed took similar measures during the crisis, it is unprecedented when the economy is not teetering on the edge of collapse.

But Fed members, warning that the pace of the recovery "continues to be slow," said "the Committee decided today to expand its holdings of securities."

The gambit raised protests from at least one Fed member who fears it is an overreaction that will fuel long-term inflation.

In a statement the Fed said panel member Thomas Hoenig voted against the measures because he "believed the risks of additional securities purchases outweighed the benefits."

He expressed concerns that the spending "over time, would cause an increase in long-term inflation expectations that could destabilize the economy."

The Fed's actions also risked fueling anger after congressional and local elections saw strong gains for candidates who back limited government and low spending.

Although the Fed's spending does not directly contribute to the US deficit or debt, critics say the outlays are symptomatic of Washington's willingness to embrace profligate spending.

Fed chairman Ben Bernanke has also faced criticism for not shrinking the bank's role in markets and for not opening the Fed up to more congressional scrutiny.

Critics of his policy argue that although the recovery is painfully slow, markets should be allowed to do their work. They also worry that if the policy fails the Fed's credibility will be wrecked.

But Bernanke's supporters argue that the Fed is failing in both of the prongs of its dual mandate: sustainable levels of unemployment and inflation.

With politicians unwilling or unable to approve a new rash of stimulative spending to help decrease joblessness or reduce the risk of deflation, Bernanke's supporters had called on the Fed to act.

Since Bernanke first suggested the possibility in late September, and confirmed it in October, markets and most economists had penciled in another round of so-called quantitative easing (QE) as a solid bet.

Goldman Sachs analysts and others predicted the rate-setting Federal Open Market Committee would start with a purchase of about 500 billion dollars in Treasury bonds.

The Fed already has poured in more than 1.5 trillion dollars to spark a recovery.

Modest third-quarter economic growth bolstered expectations of further Fed stimulus to lower long-term interest rates and fight off deflationary pressure in the slack economy.

The world's largest economy grew at a 2.0 percent annual rate in July-September, slightly more than a 1.7 percent expansion in the second quarter.

Economists consider that economic growth must reach about three percent for some time to significantly reduce high unemployment.

But more than a year after the recession officially ended, unemployment has been hovering near double-digits.

When the government reports payroll data on Friday, the jobless rate was expected to remain stuck at 9.6 percent for the third straight month in October.

* AFP