Fed Tries to Rebuild the Economy with $1.2 trillion Effort

In an attempt to lower rates on mortgages and other consumer debt, the Federal Reserve launched a $1.2 trillion program on Wednesday that it hopes will spur consumer spending.

The Fed will buy $300 billion in long-term government bonds and $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. The moves should effectively lower the interest rates lenders charge to consumers and free up capital lend.

After a two day meeting, Fed Chairman Ben Bernanke and his colleagues left the key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists expected the Fed will hold the rate close to zero through the rest of this year and into the next.

However, the Fed did surprise economists when it revealed its plan to pump $1.2 trillion of extra money into the economy.

Terry Connelly, dean of Golden Gate University’s Ageno School of Business in San Francisco told the Associated Press, "The Fed is clearly ready, willing and able to be the ATM for the credit markets."

The news is being taken well, the Dow Jones industrial average rose yesterday to 90.88, or 1.2 percent, to 7,486.58.

The Fed said it will also consider expanding another $1 trillion program. The program aims to boost the availability of consumer loans for autos, education and credit cards, as well as for small businesses.