The US Federal Reserve, in a surprise move, said tonight it will buy up to $300 billion worth of longer-term US government debt over the next six months and expand purchases of mortgage-related debt to help ease credit market conditions.
The US central bank’s action is a bold attempt to boost the struggling American economy by essentially printing money to get credit flowing again.
In a statement at the end of a two-day meeting, the central bank's policy panel also said it had decided to hold its target for overnight interest rates in a zero to 0.25 per cent range - the level reached in December.
It said rates would stay low for "an extended period," a more explicit vow to stay on hold for a prolonged time.
"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability," the Fed said.
Prices for US government bonds shot higher and US stocks jumped on the move, with the blue chip Dow Jones industrial average moving into positive territory. The dollar fell sharply to a two-month low against the euro. The euro surged above $1.34 for the first time since mid-January as analysts feared the Fed's move would flood the market with dollars and increase already large US deficits.
"This is a pretty dramatic move ... They are trying to bring down all consumer rates," said James Caron, head of global rates research at Morgan Stanley in New York.
In addition to the purchases of US Treasury debt, the Fed said it would expand an already existing program to buy debt and securities issued by the government-backed mortgage finance agencies. It said it would expand those purchases by a combined $850 billion to a total of $1.45 trillion this year. The programme has already been effective in lowering US mortgage rates.
"Bottom line is the Fed is adding a trillion dollars to their balance sheet and that's a lot of taxpayer money," said Greg Salvaggio, vice president for trading at Tempus Consulting in Washington.
With benchmark rates virtually at zero, the Fed has turned its focus to pumping money into stressed credit markets in the hope of restarting lending and restoring growth - a policy Fed chief Ben Bernanke has dubbed "credit easing."
Mr Bernanke said on Sunday repairing the tattered financial system was necessary to secure a recovery for the US economy, which has been stuck in recession for more than a year.
The Fed this week began taking bids for a programme designed to spur student, auto, credit card and small business lending, and it said today it would consider expanding that programme to cover a wider array of assets.
The consumer and small business credit program will initially aim to inject $200 billion into the market for securities backed by these loans, but the Fed has already said that programme could be ramped up to $1 trillion.
While the Fed has gone to extraordinary lengths to try to get credit flowing, the economy is still in a nose dive. US gross domestic product shrank at a 6.2 per cent annual rate in the fourth quarter, the deepest contraction since early 1982, and the unemployment rate has shot to a 25-year high of 8.1 per cent.
However, there have been some signs recently that suggest consumer spending may be stabilising and hints the battered housing sector is beginning to heal.