Fed pledges $1 trillion for lending

WASHINGTON - With its benchmark lending rate already near zero, the Federal Reserve yesterday took a new approach to knocking down lending rates across the economy: It announced it will purchase more than $1 trillion in Treasuries and mortgage bonds in hopes of sparking greater economic activity.

The money will come in addition to the $700 billion government rescue of financial institutions approved last fall and last month's $787 billion economic-stimulus package.

After yesterday's announcement, benchmark 10-year Treasury note yields plunged to 2.48 percent in New York, from 3.01 percent Tuesday, the biggest decline since records dating from 1962.

"They wanted to shock the market, and they succeeded," said Ajay Rajadhyaksha of Barclays Capital in New York.

In a part of yesterday's move designed to "provide greater support to mortgage lending and housing markets," the Fed said it would purchase an additional $750 billion of top-rated mortgage-backed securities issued by Fannie Mae and Freddie Mac.

Those two mortgage finance titans were seized by the government last September. The new purchases will bring the Fed's total purchases of Fannie and Freddie securities this year to $1.25 trillion. The Fed's purchases will give Fannie and Freddie more funds to make and guarantee mortgage loans.

Additionally, the Fed said, "to help improve conditions in private credit markets," it will purchase up to $300 billion in longer-term Treasury securities over the next six months. This will give commercial banks more money to lend to businesses and individuals - thus, sparking economic activity, the Fed hopes.

The Fed's benchmark federal-funds rate remains in a range that floats between zero and one quarter of a percent. Yesterday's Fed statement said that rate - which influences the prime rate charged by banks to their best customers - was expected to stay at these historic lows "for an extended period."

The big announcement of heightened Fed intervention to drive loan rates down was preceded by a rundown of grim economic data.

"Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession," the Fed said.

Fed Chairman Ben S. Bernanke made headlines Sunday for expressing confidence that the recession would end late this year and that the U.S. economy would return to growth so long as federal efforts to stabilize the financial sector are successful.

Yesterday's Fed statement did not go that far, noting only that "policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth."

In a nod to concerns that the Fed's assets and liabilities have grown to dangerous levels as the nation's central bank has been virtually printing trillions of new dollars to fight the recession, the statement said that the Fed "will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet."