Fed ramps up aid with $400 billion stimulus

WASHINGTON (Reuters) - The Federal Reserve on Wednesday dialed up its aid to the beleaguered economy, launching an effort to put more downward pressure on long-term interest rates over time and help the battered housing sector.

The Fed said it would launch a new $400 billion program that will tilt its $2.85 trillion balance sheet more heavily to longer-term securities by selling shorter-term notes and using those funds to purchase longer-dated Treasuries.

It will now also reinvest proceeds from maturing mortgage and agency bonds back into the mortgage market, an acknowledgement of just how weak conditions in the sector have remained.

"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated," Fed said in its statement.

Faced with a lofty 9.1 percent jobless rate, consumer and business confidence sapped by a troubling U.S. credit downgrade, and an escalating sovereign debt crisis in Europe, Fed officials have signaled they would seek to prevent already sluggish U.S. growth from weakening further.

But even as Fed Chairman Ben Bernanke has indicated the central bank's reluctance to stay on the sidelines, Fed activism has become a punching bag for politicians as an election year nears. Top Republican congressional leaders wrote to Fed Chairman Ben Bernanke this week urging the central bank to desist from further economic interventions, echoing criticism voiced by Republican presidential candidates in recent weeks.

Fed officials, however, believe that by shifting their bond holdings they could encourage mortgage refinancing and push investors into riskier assets, such as corporate bonds and stocks, without stoking a run-up in consumer prices.

The U.S. central bank is not alone in its concerns. The Bank of England on Wednesday signaled it was ready to pump more money into the weakening British economy, potentially as soon as October.

Similarly, the Norwegian central bank held its main interest rate unchanged and signaled it might refrain from rate increases for longer than previously expected due to a weaker global economy and the euro zone debt crisis.

The U.S. economy grew at less than a 1 percent annual rate over the first half of the year and analysts have warned of a heightened risk of recession. A report showing U.S. employers added no new jobs on net in August provoked widespread fear growth could stall.

The Fed has already embarked far down one of the most aggressive monetary easing paths on record. It cut overnight interest rates to near zero in December 2008 and then moved to more than triple its balance sheet to $2.8 trillion through a series of bond purchases.

After its last meeting on August 9, the Fed said it expected to hold rates at rock-bottom levels at least through the middle of 2013, a decision that drew three dissenting votes.

BROOKING DISSENT

The International Monetary Fund warned on Tuesday that the United States could fall back into recession if the government tightened its budget too quickly. It recommended the Fed consider a further easing of monetary policy as long as there was no sign an inflationary psychology taking root.

The Fed has already embarked far down one of the most aggressive monetary easing paths on record. It cut overnight interest rates to near zero in December 2008 and then moved to more than triple its balance sheet to $2.8 trillion through a series of bond purchases.

After its last meeting on August 9, the Fed said it expected to hold rates at rock-bottom levels at least through the middle of 2013, a decision that drew three dissenting votes.

Critics claim the easing campaign has failed to produce results and warn it could actually cause damage.

"We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy," Republican congressional leaders wrote in the letter to Bernanke, which they released on Tuesday.

The central bank's policies have become a topic on the presidential campaign trail as well.

Texas Governor Rick Perry, a leading Republican candidate, said any further Fed money printing would be "almost treacherous, treasonous."

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