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- iHaveNet.com: Economy
by Luke Mullins
The Open Market Committee said it would resume buying long-term Treasury bonds
Facing growing concerns that it's out of ammunition, the Federal Reserve recently pledged to battle the slowing economy by purchasing more long-term U.S. Treasury securities.
Acknowledging that "the pace of economic recovery is likely to be more modest in the near term than had been anticipated," the Fed's Open Market Committee said it would reinvest payments from
The move comes as economists express growing concern about the possibility of a double-dip recession. The Commerce department reported late last month that gross domestic product increased 2.4 percent in the second quarter, down from 3.7 percent during the previous three months. At the same time, the Fed is unable to bring its main policy lever -- the federal funds rate -- any lower. The federal funds rate currently stands in a rock-bottom range of zero to 0.25 percent.
David Resler, chief economist at
At the same time, the move could have a tangible effect. Government purchases of such Treasury debt can put downward pressure on long-term interest rates, which helps to stoke economic activity.
But how much impact will the newly announced purchases have? Not a great deal, says Michael Gapen of
Indeed, long-term interest rates are already extremely low. Thirty-year fixed mortgage rates, for example, fell to 4.49 percent for the week ending August 5. That's the lowest level since the 1950s.
However, the new program not only signals to the market that the Fed is willing to step in to support economic growth, but it also gives the Fed the flexibility put a lid on interest rates should they begin rising, says Keith Gumbinger of HSH.com. "At some point, investors are going to look for more risky assets -- they are going to go buy stocks, they are going to go buy overseas stuff -- and yields would likely rise as a result," Gumbinger says. "This allows the Fed an opportunity. If the market shifts they still have a mechanism they can employ quickly to keep interest rates low."
In addition, the Fed affirmed its previous commitment to keep the federal funds rate at near zero for "an extended period."
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Federal Reserve Moves to Support Low Mortgage Rates