The Federal Reserve recently purchased Treasury bonds and mortgage securities totaling more than $1 trillion in another attempt to strengthen the economy.
The move was its biggest yet, doubling all of the Fed’s efforts in the last year. Previously, the bank lowered the key interest rate to nearly zero as part of its rescue efforts.
Typically, the Fed buys and sells short-term debt to help control the money supply.
However, with the economy in such an unstable state, officials felt buying long-term government bonds would encourage economic activity by lowering overall interest rates, including those on home loans, and help the financial system recover from poor investments and bad loans.
As a result of the Fed’s purchase, the Dow Jones industrial average jumped almost 91 points on the day of the announcement. Yields on long-term Treasury bonds dropped, and analysts predicted that interest rates on fixed-rate mortgages would drop below 5 percent.
However, the risky move could also continue to dilute the value of the dollar and lead to inflation in the future. Following the Fed’s decision, the dollar’s value dropped sharply, and has continued to see steady declines.
The central bank is investing $300 billion in long-term Treasury securities and $750 billion in government-guaranteed mortgaged-backed securities. This is in addition to the $500 billion that the Fed was already in the process of purchasing.
These measures are amounting to an unprecedented expansion of lending by the Fed. The bank has been lending money to more and more borrowers, and has been creating new money at will in order to finance the lending.