WRAPUP 9-Fed takes bold, risky step to bolster weak economy

* Fed intends to buy $600 bln of bonds by June 2011

* Largely untested policy seen to carry risks

* Set to purchase around $75 billion per month

* Fed to review pace of buying, adjust as needed
(Updates to add link to multimedia PDF)

By Pedro da Costa and Mark Felsenthal

WASHINGTON, Nov 3 (BestGrowthStock) – The Federal Reserve launched
a fresh effort to support a struggling U.S. economy on
Wednesday, committing to buy $600 billion in government bonds
despite concerns the program could do more harm than good.

The decision takes the Fed into largely uncharted waters
and is aimed at further lowering borrowing costs for consumers
and businesses still suffering in the aftermath of the worst
recession since the Great Depression.

The U.S. central bank said it would buy about $75 billion
in longer-term Treasury bonds per month through the end of June
2011 and could adjust purchases depending on the strength of
the recovery.

“The economy is slowly digging itself out of a deep hole,”
said Brian Bethune, economist at IHS Global Insight in
Lexington, Massachusetts. “The Fed is making the right moves
here to nudge the pace up a little,” he said.

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Multimedia PDF: http://r.reuters.com/cyh73q

Fed groundwork for easing avoided market lurch [FED/FOCUS]

For more stories on Fed policy, see [FED/AHEAD]

For FOMC statement (Read more about the Fed’s FOMC), see [FED/FOMC]

For NY Fed statement, see [ID:nN03121393]
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Critics within and outside the central bank fear the Fed’s
policy will lead to high inflation and worry that low interest
rates in the United States risk fueling asset bubbles in other
countries and destabilizing currencies.

But with the U.S. economy expanding at only a 2.0 percent
annual pace in the third quarter of this year and the jobless
rate seemingly stuck around 9.6 percent, the Fed had come under
pressure to do more to stimulate business activity. HIGH
UNEMPLOYMENT, LOW INFLATION

In the Fed’s post-meeting statement, policymakers described
the economy as “slow” and said employers remained reluctant to
create jobs. They also called inflation “somewhat low.”

“Progress toward (our) objectives has been disappointingly
slow,” the Fed said, referring to its dual mandate to maintain
price stability and foster maximum sustainable employment.

Still, these domestic goals appeared to be creating
troubles abroad. The prospect of ultra-low returns in the
United States have driven investors into higher-yielding
emerging markets, pushing those currencies higher and sparking
anxiety over a loss of export competitiveness.

“We are all under attack by the relaxed monetary policy of
the United States,” Colombian Finance Minister Juan Carlos
Echeverry told investors on Tuesday. [ID:nN02221010]

With 14.8 million Americans unemployed, factories operating
well short of capacity, and inflation well below the range the
Fed would prefer, some officials at the central bank see the
risk of a vicious deflationary cycle where consumers hold off
on purchases, choking off economic growth.

Fed Chairman Ben Bernanke, in an opinion piece posted on
the Washington Post’s web site on Wednesday, said policymakers
could not sit idly by given the anemic economic backdrop. He
argued that fears that unconventional monetary policy would
spark a future bout of inflation were “overstated.”

“Inflation that is too low can pose risks to the economy —
especially when the economy is struggling. In the most extreme
case, very low inflation can morph into deflation, which can
contribute to long periods of economic stagnation,” Bernanke
wrote. [ID:nN03162124]

MARKET REACTION SUBDUED

The overall size of the bond buying program was slightly
larger than the $500 billion that many analysts had looked for,
though the pace of monthly buying fell short of expectations
for something around $100 billion.

Market reaction was initially volatile but at the end of
the day left the recent uptrend in stocks and downtrend in the
U.S. dollar intact.

The Standard & Poor’s 500 index of U.S. stocks (Read more about the stock market today. ) rose just
0.37 percent after initial losses and the dollar fell against
the euro. U.S. Treasury bond yields fell for shorter-dated
maturities. Disappointment that the Fed did not expand buying
to 30-year bonds led to a sharp rise in long-dated yields.

While doubts lingered about the ability of bond purchases
to kick start a moribund economy, there was a sense in the
market that the Fed was open to doing more if the recovery
remains sluggish.

“The (Fed) is still leaning toward the easier side and
views the program as being open-ended,” said Ward McCarthy,
chief financial economist at Jefferies in New York.

Nearly 90 percent of the Fed’s purchases will be of
Treasuries with maturities ranging from 2-