Federal Reserve announces government debt purchase plan

11 August 2010

The US Federal Reserve (Fed) has outlined plans to use its proceeds from mortgage securities investments to purchase longer-term government debt.

It is hoped that the move will bolster economic recovery in the US, after the Fed warned that the pace of the upturn has slowed in the last few months.

The Fed had initially hoped to reduce the amount of money it is putting into the US economy, but the slowdown has led to a decision to maintain its $2.3 trillion balance sheet, reports BBC News.

This will be achieved by reinvesting repayments on debt and mortgage-backed securities into US Treasury bonds.

Its decision has been praised as a positive step by Societe Generale analysts Stephen Gallagher and Aneta Markowska.

"The Fed's investments in longer-dated Treasury debt should ... lower mortgage and other borrowing rates," the pair stated.

Prior to the beginning of the financial crisis, the Fed's balance sheet stood at around $800 billion, but it has then undergone an unprecedented expansion as money was pumped into the economy to try and head off the worst effects of the downturn.

The Fed has stated that near-term economic recovery is now going to be "more modest" than was previously hoped.

"Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit," it said.

According to data from the US Labor Department, business productivity in America dropped by 0.9 per cent in the second quarter of 2010, the first time that output per worker has fallen since the fourth quarter of 2008.

Productivity rates were up by 3.9 per cent in the first three months of this year.

Earlier this year, Ben Bernanke, the chairman of the Federal Reserve, pledged the organization would do a better job should another financial crisis occur.

By Gary Cooper

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