Pulling out all the stops to try to break the downward spiral of the economy, the Federal Reserve on Wednesday said it would continue to flood the financial system with money and moved a step closer to purchasing longer-term Treasury securities.
The Federal Open Market Committee kept its interest rate target in a range of zero to 0.25%, as expected. Rates will need to stay close to zero for "some time," the statement said.
The lack of action on interest rates was expected, as was the FOMC's statement that rates were likely to stay low for a considerable length of time.
The Fed said the economy was weak but still held out hope for a second-half rebound. Deflation became the primary worry on the price front.
All of the action in the statement was related to the Fed's continuing effort to support credit markets. The Fed has stepped in to keep some markets functioning.
In essence, the Fed has adopted a "throw the kitchen sink" approach to supporting the fragile financial system, which is dragging the economy lower.
"The Fed stands ready to buy anything that anyone suggests might help. The sky is the limit," said Mike Englund, chief economist at Action Economics.
Buying longer-term Treasurys would be a new tool in the Fed's arsenal to repair financial markets. Some economists worry that buying Treasurys would cause foreign investors to lose their appetite for the securities.
"If the Fed commits itself to a policy of artificially depressing the returns on Treasury securities for an extended period, it will force investment committees around the world to reconsider their portfolio allocations to the U.S. Treasury market as an asset class," wrote Lou Crandall, chief economist at Wrightson ICAP in a note to clients.
The Fed said was "prepared" to buy Treasurys "if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
In December, the central bank just said it was mulling over the option.
Still, Treasurys were still down after the Fed statement was released. Analysts said that some investors were disappointed that the purchases didn't start at once.
There was some sense of "holding back," Englund said.
The Fed is already buying commercial paper and mortgaged backed securities and is about to start a program to buy AAA rated consumer loans.
The Fed said it was going to continue these efforts.
"The Fed will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the statement said.
"The focus of the FOMC's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Fed's balance sheet at a high level."
Some good results seen
Although tangible results are slim, the Fed said that "some" financial market conditions have improved.
For instance, the Fed has a plan to buy $500 billion in mortgage securities. This has already driven down rates on mortgages.
