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.

U.S. unemployment at 25-year high, 12.5 million people jobless

The U.S. unemployment rate rose to a 25-year high of 8.1 percent in February as employers shed 651,000 jobs in the deepening recession, government data showed on Friday, Mar. 6. A total of 12.5 million people were unemployed in February, the Labor Department said.

February's jobless rate was the highest since December 1983 and was a half percentage point above January's 7.6 percent.

Since the recession started in December 2007, the economy has shed 4.4 million jobs.
Companies struggling with falling revenues and tight profit margins are axing jobs in huge numbers, forcing households to further scale back spending, creating a vicious cycle.

The Obama administration has been rolling out a $787 billion stimulus package to try to break the economy's frightening downward spiral.

Third attempt in bailing out Citigroup

The government will swap the $25 billion in Citigroup’s preferred stock from its earlier bailout money into common stock. The Treasury Department said the swap is contingent on private investors making a similar swap. The deal announced Friday, Feb. 27 represents the third rescue attempt in the past five months for Citigroup, which has been struggling under the weight of losses tied to bad bets on mortgages.

This will boost the taxpayers' stake and risk in the struggling bank from 8 percent to 36 percent. The government's big stake in the common stock means taxpayers will share in future gains or losses in the company's share price. The stock conversion will make the government the largest shareholder in Citigroup

Citigroup said it has offered to swap up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 share. The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among the private investors that said they would participate in the exchange. The U.S. government will match this exchange up to a maximum of $25 billion face value of its preferred stock at the same conversion price.

The conversion of the government's Citigroup stock will give the bank more capital reserves to withstand mounting losses on its holdings of mortgages and other loans, as well as to survive further economic weakness, satisfy regulators, and eliminate the need to pay dividends. The transaction also frees Citigroup from having to buy back the preferred shares from the government. The preferred shares are similar to debt, and the banks were under pressure to essentially pay back the government in five years.

The arrangement inflames some investors' worries of bank nationalization. They think that this is another step toward creeping nationalization. Federal Reserve Chairman Ben S. Bernanke said Feb. 25 he wants to avoid nationalizing Citigroup and other large banks in a way that would wipe out shareholders and leave the U.S. in full control. Bernanke said the government might end up owning a “substantial minority” of the bank.

Investors were unhappy with the Citigroup deal, sending its shares plummeting 39 percent to a new 52-week low of $1.50 on Friday, Feb 27. The Dow Jones industrials average fell 119 points to 7,063. Sour market reaction was understandable given that the government is taking a bigger role in Citigroup and the shares of common stock are being diluted.