U.S. Federal Reserve to buy $600B in bonds

The U.S. Federal Reserve announced a widely expected move to stimulate the American economy Wednesday.

The Fed said it will embark on another round of buying U.S. government debt, in the form of monthly purchases averaging $75 billion US until mid-2011 for a total of $600 billion.

North American markets took the move in stride, moving modestly lowerafter the announcement.

In Toronto, the S&P/TSX composite index was lower by 39 points, or 0.3 per cent, to 12,643.

In New York, the Dow Jones industrial average is down 29 points, or 0.3 per cent, to 11,160.

The S&P 500 was down five points, or 0.5 per cent, at 1,188, while the Nasdaq composite was down six, or 0.2 per cent, at 2,528.

In its announcement, the central bank said the pace of the U.S. recovery has been "disappointingly slow."

It expressed worry that the high 9.6 per cent unemployment rate might put enough downward pressure on inflation to tip the economy into deflation or a period of a sustained drop in prices.

At its worst during the Great Depression, deflation led to widespread bank closures, high unemployment and social unrest.

Fed will regularly review pace of purchases

The Fed said it "will regularly review the pace of its securities purchases" and adjust them "to best foster maximum employment and price stability."

The purchases will bein addition to an expected $250 billion to $300 billion in Fed purchases over the same period from reinvesting proceeds from its mortgage portfolio.

It also left its benchmark interest rate unchanged at a range of between zero and 0.25 per cent.

One member of the Fed's monetary policy-making committee, Thomas Hoenig, voted against the stimulus program and leaving the rate unchanged on the grounds the moveswould risk creating inflation.

The aim of the program is to buy bonds from banks, providing them with more cash to lend at lower interest rates, in turn encouraging consumers to make purchases and for firms to increase hiring.

But the risks are that the move will cause inflation, prompt the kind of cheap debt that caused the financial crisis in 2008, or trigger currency wars as exporting economies respond to a falling U.S. dollar.

Program has 'considerable limitations'

In what he described as "perhaps the most anticipated Fed statement in decades," James Marple, senior economist with TD Economics, said there are "considerable limitations" on how effective the program can be.

Consumer spending will be constrained as householders pay off high debts amid uncertainty about jobs and house values, he said.

"There is little reason to believe that (additional billions) will significantly alter this," Marple said in a commentary.

But, he added, "at the very least, (it) should succeed in holding down interest rates and give more time for the economic recovery to gain momentum."

The Fed already has driven rates to super-low levels by cutting its benchmark rate.

Anticipation of the Fed's new program has helped push down mortgage rates to their lowest points in decades. Yet the economy is still struggling.

This the second time the bank has pursued the unorthodox strategy of buying long-term bonds. It first did so in 2009, when it bought $1.7 trillion in mortgage and treasury bonds.

Those purchases helped lower long-term rates on home and corporate loans. The program was credited with helping to lift the country out of recession.