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Inside the Fed's Trillion-Dollar Decision: Crisis Outweighed Inflation Fears

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By Annys Shin
Washington Post Staff Writer
Thursday, April 9, 2009

Worries about a prolonged economic slump and a lack of progress in thawing frozen credit markets persuaded Federal Reserve leaders last month to inject more than a trillion dollars into the economy, according to meeting minutes released yesterday.

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The decision to buy nearly $1.2 trillion in long-term Treasury bonds, mortgage-backed securities, and the debt of mortgage-finance firms Fannie Mae and Freddie Mac was the latest in a series of unconventional measures the central bank has used to combat the recession.

The move also reflected how much worse economic conditions have become since the last meeting of the Fed's policy-setting arm, in January, when Fed leaders backed away from buying long-term Treasury bonds. At the time, some were worried that doing so would fuel perceptions that the United States was printing money to cover large government deficits.

At the March meeting, however, the grim state of the economy overcame those concerns, the minutes showed.

Since Fed leaders' January meeting, unemployment had continued to rise. Consumer and business spending remained weak. Sharp cuts in production by businesses were not making enough of a dent in inventories. And the global nature of the downturn meant the economy would not be able to rely on U.S. exports to make up for the steep decline in demand at home.

The outlook going forward was not looking much better as the staff of the Fed revised its forecast downward, with a recovery possible next year.

Most of those in attendance agreed that the economy was at risk of becoming mired in a self-perpetuating slump, in which rising unemployment would depress spending and fuel loan defaults, sticking banks with more bad debt and, in turn, making them less willing to lend.

The Fed's strategy of buying long-term government bonds and mortgage-backed securities, known as quantitative easing, has several potential pitfalls. It will increase the Fed's assets by about 50 percent, to more than $3 trillion. The central bank could have trouble pulling out the staggering sums of money it has pumped into the economy once the recession ends, leaving too much money in circulation and sparking inflation.

But at the March meeting, Fed leaders "saw little chance of a pickup in inflation over the near term," according to the minutes.


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