Fed moves to lower long-term interest rates, mortgage rates

Federal Reserve Board Chairman Ben Bernanke in the board room at Federal Reserve headquarters in Washington


In a further bid to shore up the anemic economy, the Federal Reserve Board will buy $400 billion in long-term Treasury securities by June 30.

The new program, called "The Twist," after a similar '60s-era program, means the Fed will sell its holdings of short-term Treasuries to finance its purchases on long-term notes and bonds.

"This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative," the Fed said in its statement Wednesday.

Other actions:

•The key fed funds rate will remain between 0% and 0.25%, probably through June 2013.

•The Fed will also buy mortgage-backed securities to keep mortgage rates low.

In its statement, the Fed painted a picture of a barely growing economy: High unemployment, depressed housing, low household spending. The statement said the Fed thinks unemployment will only shrink slowly.

"It's more like a 'Twist and Shout,'" says Mark Vitner, senior economist at Wells Fargo. "They're making it known that they will do more if they need to."

The Dow Jones industrial average plunged 283.82 points, or 2.5%, after the announcement. The bellwether 10-year Treasury note fell to 1.89%. The dollar rallied against the euro and the yen.

The Fed's moves will presumably lower mortgage rates even further. The current 30-year fixed-rate mortgage rate is 4.09%, the lowest since mortgage giant Freddie Mac began tracking them in 1970. "That's good if you're among those who can refinance," says Ryan Brecht, senior economist at Action Economics.

Savers could see a very modest increase in short-term rates as the Fed sells off its short-term securities to buy long-term ones.

The Fed's move is in defiance of a letter sent Monday to Fed Chairman Ben Bernanke from four ranking congressional Republicans that urged the Fed not to further stimulate the economy.

"Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers," said the letter, which was signed by Senate Republican leader Mitch McConnell, Senate Republican Whip Jon Kyl, House Speaker John Boehner and House Majority Leader Eric Cantor.

The letter is unprecedented in recent times. "It's in our country's long-term best interest to have an independent central bank, not one seen as kowtowing to the president or Congress," Vitner says.

Brecht noted that Wednesday's statement emphasized the Fed's dual mandate of fighting inflation and encouraging full employment. "The mandate doesn't say that one is more important than the other," he says.

Three members of the Fed's powerful Open Market Committee dissented from Wednesday's statement: Richard Fisher, Narayana Kocherlakota, and Charles Plosser.

Dow soars 429 points after Fed makes new pledge on rates

The Dow Jones industrial average surged Tuesday, ending a volatile session up nearly 430 points after the Federal Reserve pledged to keep short-term interest rates near zero for at least two more years.

The blue-chip index gyrated throughout the session as investors weighed the implications of the Fed's surprise move. But buyers flooded into battered stocks in the final hour.

The Dow closed up 429.92 points, or 4%, to 11,239.77, its biggest gain of the year.

The central bank's statement after its midsummer meeting helped energize investors looking for any scrap of good news after a global rout in stocks since Standard & Poor’s downgraded the U.S. credit rating late last week. On Monday, the Dow fell a stunning 635 points, or 5.6%, its worst decline since the financial-system meltdown in 2008.

Many analysts said the market was primed to bounce after deep losses over the last two weeks on fears over the fading economic recovery.

What's more, some noted that the Fed's new pledge on interest rates came as policymakers downgraded their expectations for the economy in the short run. That could cause some investors to reconsider how smart it may be to stay in stocks for the time being.

The Fed said it “now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting.”

Also, the Fed's decision on rates drew dissents from three members of the policymaking committee, a sign of fracturing views within the central bank.

Still, the bulls had control late Tuesday. The Standard & Poor’s 500 soared 53.07 points, or 4.8%, to 1,172.53. The tech-heavy Nasdaq composite jumped 124.83 points, or 5.3%, to 2,482.52.

With Tuesday's rebound, the Dow is down 2.9% year to date, the S&P 500 is down 6.8% and Nasdaq is off 6.4%.

Some investors rushed to lock in yields on longer-term Treasury bonds after the Fed statement, with short rates now likely to remain at rock bottom "at least through mid-2013," according to the Fed.

In theory, if businesses and investors believe that short-term rates won't rise for at least two years, they would have more incentive to do something potentially more productive with their money than keep it in bank accounts earning nothing. That could include investing in longer-term Treasury, corporate and municipal bonds.

The 10-year T-note yield fell to 2.25% from 2.34% on Monday. At one point the yield fell as low as 2.10%. The five-year T-note sank to 0.99% from 1.08%.

-- Joe Bel Bruno and Tom Petruno