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Federal Reserve to Buy Up to $1 Trillion in Government Bonds, Mortgage Debt

U.S. central bank policy makers announced new actions Wednesday to help jump-start the nation's ailing economy.

Federal Reserve officials announced a plan to purchase up to $300 billion in long-term U.S. government bonds to bolster the nation's economy.

Economists say the move is designed to help improve credit conditions by lowering the cost of borrowing.

"If the Fed goes out and buys longer-term Treasury securities, and buys them in significant amounts, what will happen is longer-term interest rates should come down. And one rate that matters a lot right now is mortgage rates, and those typically follow Treasury rates," said former Federal Reserve economist, Ann Owen.

The Bank of England began a similar program of buying up government bonds earlier this week.

Like the Bank of England, the U.S. Federal Reserve has all but exhausted one of its most powerful tools for stimulating the economy -- lowering the key interest rate that banks charge to lend to each other. Federal Reserve officials on Wednesday decided to leave this interest rate at nearly zero percent.

The central bank also announced that it would purchase up to $750 billion of additional mortgage-backed securities, which lost value with the collapse of the U.S. housing market.

The hope is that by unburdening banks of these assets, they will increase lending to potential home buyers.

Most economists, including Tara Sinclair of The George Washington University, say these initiatives show that the U.S. central bank is taking aggressive action. "I think they were making a very clear statement that they are concerned about the current state of the economy and that they need to take action now and they're going to [take] pretty dramatic action. This is a lot of money," she said.

In announcing their decision, Federal Reserve policy makers noted significant challenges facing the economy, including rising unemployment and declining consumer spending. They said they will employ all available tools to promote economic recovery.

Jay Bryson, global economist at Wachovia Bank, says the central bank has accomplished some of its goals."I think there is some tentative evidence that some of the things the Fed has done [are] starting to help. It certainly has stabilized the financial system at this point. But we're certainly not out of the woods by any stretch of the imagination," he said.

As for how long the recession will last, Bryson predicts that the economy could turn positive by the end of the year. But he warns it will not be a fast recovery. "The effects of some of the government stimulus kicking in, some of the effects of these attempts to stabilize the financial system will all lead to things turning around. But that said, our forecast for the recovery for next year, 2010, is still quite muted," he said.

The Federal Reserve says the U.S. economy is tied to the health of economies overseas, noting that exports have decreased as major trading partners have also fallen into recession.