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Fed expected to buy Treasury bonds to lower rates

by Adam Russett on November 3, 2010

After a two-day meeting, the U.S. Federal Reserve is expected to announce a plan to buy U.S. government bonds in order to stimulate the economy, keep interest rates low and curb deflation risks, reports MoneyControl.com.

The Federal Open Market Committee meeting concludes today at 2:15 p.m. and will follow with an announcement that the Fed will begin implementing a large economic stimulus package. The strategy, known as quantitative easing, involves the U.S. Central bank purchasing long-maturity Treasury bonds.

The U.S. Central Bank will begin with purchases of $500 billion of longer-term Treasury bonds, spending $100 billion a month depending on economic conditions, according to The Wall Street Journal.

The announcement comes amid disappointment among law and policy makers with the unemployment rate stuck at 9.6 percent, inflation and overall economic idleness.

The Fed hopes its purchases of U.S. government bonds will lower borrowing costs and encourage increased spending as well as push investors out of the Treasury and into riskier investments such as stocks, according to ABC News.

They also hope to stimulate the housing market. The Fed's first round of quantitative easing may include purchasing debt issued by government agencies like mortgage giants Fannie Mae and Freddie Mac, said Stuart Hoffman, chief economist with PNC Financial Services Group to CNN.

Some experts believe the impact of the stimulus will be minimal. "When you get interest rates as low as they are, they can't go much lower, so I don't look for any overpowering results of this action," former Fed Chairman Paul Volcker told MoneyControl.com.

According to RFERL.com, keeping interest rates low is disadvantageous for the U.S. because investors will flee in face of a low return period in favor of emerging markets such as Brazil and India.

The dollar is expected to depreciate 20 percent over the next few years due to these easing efforts by the Fed, according to Reuters. 

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