Fed Hold Rates Near Zero; To Buy Tsys, More MBS

The Federal Reserve said Wednesday it will buy up to
$300 billion in longer-term Treasurys and raise the size of a lending program
aimed at mortgage-backed securities by another $750 billion, a forceful
reminder that officials still have powerful tools to combat the recession.

The Fed, as universally expected, also took no action on its main policy
rate, holding it near zero.

The commitment to buy Treasury securities and additional mortgage-related
debt will almost certainly cheer Wall Street, since the combination should mean
lower rates for a variety of business and consumer loans.

The Federal Open Market Committee voted 10-0 to hold the target federal-funds
rate for interbank lending in a range between zero and 0.25% and to continue
using credit programs financed by an expansion of the Fed's balance sheet to
stabilize markets.

Richmond Fed President Jeffrey Lacker, who dissented in January, went along
with the rest of the FOMC this time. He had wanted the Fed to focus on Treasury
purchases as opposed to targeted credit programs.

The discount rate for Fed loans was unchanged at 0.5%.

"Information received since the [FOMC] met in January indicates that the
economy continues to contract," the Fed said.

Officials repeated their pledge to keep rates exceptionally low for an
extended period. With rates near zero, the Fed has financed its various credit
facilities via an increase in bank reserves - essentially printing money, as
Fed Chairman Ben Bernanke explained in a "60 Minutes" interview aired Sunday.

The Fed will buy up to $300 billion in long-term Treasurys over the next six
months, it said. The additional mortgage-backed securities purchases will push
the Fed's mortgage-related facility to as much as $1.25 trillion. The Fed also
said it would increase the size of its agency debt purchase facility by $100
billion to $200 billion.

The Fed's strategy appears to be to double down on the programs that it
thinks work. In addition to commercial paper and money market mutual fund
facilities, which appear to have stabilized those sectors, Bernanke has
repeatedly highlighted the decline in mortgage rates in response to the agency
and mortgage-backed securities facilities, calling it one of the "green shoots"
evident in some markets.

The Fed also said it would like to expand eligible collateral for the Term
Asset Backed Securities Loan Facility, or TALF. The TALF is aimed at spurring
new lending in consumer, student loan, small business and real estate markets
and could eventually total $1 trillion. The Fed is accepting applications for
some of those TALF loans and will start dispersing funds next week.

As for the economy, the Fed said, "although the near-term economic outlook is
weak, the Committee anticipates that policy actions to stabilize financial
markets and institutions...will contribute to a gradual resumption of
sustainable economic growth." Exports, meanwhile, "have slumped," the Fed said,
reflecting the global downturn.

U.S. gross domestic product is on track to decline 5% or more, at an annual
rate, in the first quarter. It plunged at a 6.2% rate in the fourth quarter of
2008, the steepest in a quarter century. The pace of employment loss has
stepped up since the January meeting, with the economy now shedding more than
650,000 jobs per month, pushing the unemployment rate to 25-year highs.

One nugget of good news is that consumer spending figures signaled some
stabilization since the start of the year. Since consumption makes up about 70%
of the economy's output, a revival in spending would signal better times ahead.
But economists are divided on how to interpret the January-February figures.

Officials made few changes to their assessment of inflation, repeating that
it should stay subdued and may even persist for a while below rates the Fed
thinks are consistent with a growing economy and price stability.

U.S. consumer prices rose for a second-straight month in February, the
government said Wednesday, easing fears somewhat over prolonged price declines
known as deflation.

However, consumer prices are up just 0.2% from a year ago, well below the 2%
rate most Fed officials think is consistent with their long-term goals.