WASHINGTON -- The Federal Reserve said Wednesday it would shift around more than $400 billion in its portfolio to try to drive down long-term interest rates, make home and business loans cheaper and invigorate the economy.
The Fed's plan is modest compared with previous steps it's taken. The central bank won't expand its $2.9 trillion holdings; rather, it's just rebalancing them.
It will sell $400 billion of its shorter-term Treasury notes to buy longer-term treasuries by June 2012. And it will reinvest principal payments from its mortgage-backed securities, to help keep mortgage rates at super-low levels.
Fed policymakers announced the moves after a two-day meeting. Three of 10 members dissented from the decision, the same three who dissented at August's meeting. They have said the Fed's policies may be raising the risk of high inflation and they favor giving the economy more time to heal without new intervention.
Prior to the central bank's meeting, Rep. Eric Cantor (R-Va.), the No. 2 Republican in the House, called in a letter for the Fed to use restraint. "Many of us feel that some of the very loose monetary policy has had a negative effect as far as global confidence in our currency and ultimately in our economy," he wrote. The other three top Republicans in Congress signed on.
"The actions the Fed has taken are helpful," says Josh Feinman, global chief economist at DB Advisors. "They will help hold down long-term rates, but they're no panacea."
Stocks dropped immediately after the plan, dubbed "Operation Twist," was announced. The Dow Jones industrial average closed down about 283 points. Insurers were some of the hardest-hit.
The plan could threaten the earnings of some of the country's largest insurers. The KBW Insurance Index lost 5.2 percent Wednesday. That's because insurers' investment portfolios are going to have a hard time keeping up with their obligations if the Fed successfully keeps rates at very low levels.
The plan resembles a program the Fed used in the 1960s to "twist" long-term rates lower relative to short-term rates.
In its statement, the Fed noted that the economy is growing slowly, unemployment is high and housing remains in a prolonged slump.
Under its plan, the Fed will extend the average maturity of its holdings from six years to eight years. The Fed directed the New York Fed to buy treasuries with remaining maturities of 6 to 30 years, and to sell an equal amount of securities with maturities of 3 years or less.
Analysts say the shift in the Fed's portfolio could reduce borrowing costs and perhaps raise stock prices.