Fed to pump $600B into financial system to spur economy

WASHINGTON - The Federal Reserve announced plans Wednesday to pump $600 billion into the U.S. financial system, an expansive and unconventional new effort to try to get the sputtering U.S. economy on track.

The Fed will, in effect, print money to buy Treasury bonds - at a rate of about $75 billion a month by next June - in a bid to lower long-term interest rates and start the chain reaction that finally creates jobs and invigorates the economy.

The idea of this "quantitative easing" is to encourage people to spend more money and stimulate hiring, both ways of accelerating economic growth.

With the economy weak, the Fed is aiming to avoid the kind of economic stagnation that gripped Japan and led to a "lost decade" during the 1990s. Japan is still recovering from deflation, the self-reinforcing cycle of lower prices, during that time.

The Fed actually wants to raise inflation from its current level, which is extremely low. Besides warding off deflation, a little inflation indicates the economy is growing.

But among the plan's risks is that it will essentially work too well and drive inflation to dangerous levels. Another risk is that it will sap more strength from the dollar, which is already weak, aggravating trade disputes with other countries.

When the government buys bonds it devalues the dollar because the government is essentially printing more money, thereby increasing the supply of U.S. currency and consequently cheapening the dollar.

The plan was immediately met with worries that it would not help enough and could backfire by causing inflation, creating asset bubbles and further weakening the dollar.

Several Fed officials have expressed resistance to the move, including Thomas M. Hoenig, president of the Kansas City Fed, who dissented Wednesday.

"Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits," the Federal Open Market Committee statement said. Hoenig was concerned about "the risks of future financial imbalances" and "an increase in long-term inflation expectations that could destabilize the economy."

Other Fed officials expressed similar doubts, even before Wednesday's announcement. Philadelphia Fed president Charles Plosser said Sept. 29 that he doesn't see how additional asset purchases will help employment in the near term, and Minneapolis Fed president Narayana Kocherlakota said in a recent speech that a new round would probably have a "more muted effect" than prior purchases.

Even some analysts not concerned about inflation or speculative bubbles said the plan was unlikely to do much good.

"Bottom line: The plan provides a boost to the economy's growth, but it is not going to solve our problems," said Mark Zandi, chief economist at Moody's Analytics. "Even with the Fed's action, we're going to feel uncomfortable about the economy in the next six to 12 months."

Beyond that, no one gets a job when the central bank buys a bond. It's only when the Fed's decision to buy a bond persuades another economic actor to spend money that hiring ticks up. Thus far, that's not been happening.

Banks and corporations have been stockpiling cash, waiting for a recovery that, paradoxically, won't take hold until they start lending and spending again.

"I'm worried," says Alan Blinder, a former vice chairman of the Federal Reserve's Board of Governors. "I'm quite convinced that it'll be a lot less effective than the first time we did this, and that makes me worried that it won't be very effective."

Wednesday, hours after the Fed announcement, Federal Reserve Chairman Ben Bernanke said worries are overblown that the plan could unleash inflation.