Fed will shuffle $400B in plan to aid economy

Associated Press

WASHINGTON

The Federal Reserve said Wednesday it will shuffle $400 billion of its portfolio to try to drive down long-term interest rates and get the economy going. But economists doubted it would do much good, the stock market sold off, and the Fed itself was unusually divided over the strategy.

Lowering interest rates makes it cheaper for people and companies to borrow money and spend it throughout the economy, which has slowed sharply more than two years after the Great Recession. Consumer spending makes up most of the nation’s economic activity.

But rates are already at historic lows. Americans, still feeling insecure about the future, might not be willing to take on more debt, even at lower rates. Others see no reason to jump into the housing market when prices are still falling. Others can’t get credit.

“Frankly, I don’t see it having any meaningful impact on the economy,” said Bernard Baumohl, chief global economist with the Economic Outlook Group.

Yields on U.S. government debt were already among the lowest on record, and investors drove them down further after the Fed announcement. The yield on the 10-year Treasury note, an indicator for mortgages and other long-term loans, closed at 1.86 percent, down from 1.93 percent the day before and the lowest since at least 1962.

Along with the strategy statement, the Fed gave a stormy overview of the economy — slow growth, high unemployment and a slumping housing market. The Fed has already said it will keep short-term interest rates super-low into 2013, a sign that the central bank was not optimistic about the next two years.

Three members of the Federal Open Market Committee, the policymaking arm of the Fed, dissented. There are 10 members in all, including Chairman Ben Bernanke, and usually no more than two dissent. The three have said the Fed’s policies may be raising the risk of inflation.

The stock market fell quickly after the Fed announcement, which came just before 2:30 p.m. The Dow Jones industrial average, which was down about 20 points before the statement, finished the day down 283 points, or 2.5 percent.

The Fed will sell $400 billion from its holdings of short-term U.S. government debt — Treasury bills and notes that mature in three years or sooner. It will use that money to buy Treasury notes and bonds with maturities of six to 30 years. The Fed said the shift would be complete by June.