WASHINGTON — Escalating the government's already aggressive effort to revive the struggling economy, the Federal Reserve said Wednesday that it would spend an additional $1 trillion to bring down interest rates on home mortgages and other business and consumer loans.
The surprise news that the central bank would more than double its planned purchases of mortgage bonds and also start buying large quantities of Treasury bonds had an immediate effect on the financial markets. The Dow industrials posted their sixth gain in seven trading days, while long-term interest rates plummeted -- exactly the reaction the Fed wanted.
The Fed's latest move -- coupled with an unprecedented panoply of previous steps by the government to fix the financial crisis and stimulate spending -- makes it more likely that the country's 15-month-old recession will be over by the end of this year, with economic growth resuming early in 2010, economists said.
"They are trying to fire absolutely every weapon they can," said Nigel Gault, chief U.S. economist at forecasters IHS-Global Insight in Lexington, Mass. "It improves the odds that we'll bottom out in the second half of the year."
The central bank's main tool to combat a recession, lowering a key short-term interest rate, was no longer an option because that rate had already been slashed to practically zero.
So instead the Fed intends to buy an additional $750 billion in mortgage-backed bonds issued by Fannie Mae and Freddie Mac, more than doubling its planned purchases this year of those securities. And, in a rare move, it also plans to buy $300 billion of long-term U.S. Treasuries.
"The Fed has been looking for a new way to make a big headline announcement effect on the markets, and they have found it," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi.
But the action also increases the risk that inflation, dormant for the last year, could spring back to unwelcome heights. That danger sent the value of the dollar down against other currencies and boosted the market price of gold by about $50 an ounce, putting it back above $900.
The prospect of recovery, however, cheered the stock market, which had been down for the day before the Fed's announcement. The Dow Jones industrial average closed up 90.88 points, or 1.2%, at 7,486.58. The broader Standard & Poor's 500 stock index surged 2.1%.
Since hitting 12-year lows last week, the Dow has jumped 14% and the S&P is up 17%.
