Fed buying $300B in Treasurys

Central bank also announces it will buy another $750B in mortgage bonds as it tries to get credit flowing again.

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By Chris Isidore, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- The Federal Reserve announced Wednesday it would buy $300 billion of long-term Treasurys over the next six months in order to try and get credit flowing more freely again.

The Fed also announced plans to buy an additional $750 billion in mortgage-backed securities, a move designed to lower mortgage rates.

The Fed suggested it was planning to buy Treasurys in statements issued after the two previous meetings of the Federal Open Market Committee, the policymaking committee of the Fed that sets interest rates. So Wednesday's announcement, which came at the conclusion of the FOMC's latest meeting, was not a major surprise.

Still, stocks turned higher on the news. Bond prices also surged, causing yields on longer-term Treasurys to fall sharply. The rate on the 10-year note fell about 0.3 percentage points immediately after the news to about 2.6%, while the yield on the 30-year note also fell 0.3 percentage points to around 3.6%.(Bond prices and rates move in opposite directions.)

The Fed also left interest rates unchanged at a range of 0% to 0.25%. Interest rates have been near zero since December.

"The message to the financial market is that the central bank is willing to do whatever it takes to stabilize the market," said Sung Won Sohn, economics professor at Cal State Channel Islands.

Sohn said the programs announced Wednesday show that the Fed "has plenty of ammunition even though interest rates are near zero."

The rally in stocks came even as the Fed warned in its statement that the U.S. economy has gotten worse since its last meeting in January. The central bank pointed to further job losses, declines in the value of stocks and homes, tight credit conditions and weak consumer sentiment and spending.

While the government reported the biggest jump in its key inflation reading earlier in the day Wednesday, the Fed said in its statement it believes that inflation would remain "subdued."

Instead, the Fed expressed more concern about deflation, in which falling prices lead businesses to further cut their output and employment. In its statement, the Fed said it "sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

The Fed's decision to buy Treasurys and more mortgages has the potential of leading to inflation down the road by significantly increasing the money supply. The Fed is essentially printing money to buy these bonds and securities, rather than drawing on tax dollars.

Some Fed watchers expressed concern about the Fed taking this step.

"Maybe this is the only way out. Maybe it is just that bad. But there is a real chance that the patient could die from the medicine, not the disease," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

Giddis called the Fed's decision to spell out in specific terms the dollar amount and timing of the purchases as the "the ultimate gift card" for Treasury speculators.

The U.S. dollar was one immediate victim of the Fed's decision. The greenback hit a two-month low versus the euro and lost ground against other currencies as well. A weaker dollar could lead to Americans paying higher prices for imported goods, including oil.

Foreign exchange expert Ashraf Laidi, chief market strategist at CMC Markets in London, said the flood of new dollars into the system is a concern to currency traders, and will likely lead to further declines in the coming days.

"Dollar selling is going to be quite aggressive at times," he predicted. To top of page

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