The Fed pumps $1.2 trillion to the economy

The U.S. central bank would pump $1.2 trillion into economy to combat the worst global slowdown in decades, the Fed announced Wednesday, Mar. 18. The central bank’s plans to buy up to $300 billion long-term government bonds and some $750 billion in mortgage-backed securities, which would help revive the U.S. sagging housing market.

The Fed hasn't set out to influence long-term interest rates by buying long-term bonds since the 1960s.

By buying Treasurys and lifting the size for its programs to buy mortgage-backed securities and agency bonds, the Fed will boost money supply available for borrowing to combat the recession. The moves aims to lower mortgage rates and reduce the premium companies have to pay over the federal government to secure funding from the capital markets. The lower borrowing costs for consumers and companies are expected to prop up demand and spending in the U.S.

The Federal Reserve has been moving toward this quantitative easing policy since mid-September 2008. The policy is essentially required the Fed to print money to put the financial system back on its feet and jump-start the economy. But economists warned that such efforts could lead to long-term inflation, and could drive down the value of the dollar.

The Fed’s Open Market Committee also announced it would keep interest rates near zero, and said it expected its target interest rates to remain exceptionally low “for an extended period.” Interest rates in the U.S., the fed-funds target rate, has been in the range of 0%-0.25%. In all major economies, the interest rates have been pushed to ultra-low levels.

Moments after the Federal Reserve announced its plans, yields on the benchmark 10-year Treasury note posted their biggest drop in years as investors welcomed a big new buyer to the market for government debt. The central bank’s decision to fire up $1.2 trillion continued to sweep over world financial markets on Thursday, pushing the price of government bonds higher and dragging down the value of the dollar.

The Fed’s plan follows similar actions taken by central banks across the globe. The Bank of England is buying government securities, while the Swiss is selling francs to try to push down the value of their currency. The Bank of Japan announced Wednesday that it would also expand its purchase of government debt by almost 30 percent.

The markets are responding favorably to the U.S. Federal Reserve's bold $1.2 trillion spending plan. On Wall Street, stocks advanced on the day, but slipped on the next day. World stock markets were mostly higher the next day, Mar. 19.

The dollar has been sold off aggressively across the board in the wake of the Federal Reserve's decision. The dollar extended its decline against the euro, the yen and other major currencies on Thursday.