Thursday, January 29, 2009

Fed says prepared to buy debt to aid economy

WASHINGTON (Reuters) – The Federal Reserve on Wednesday inched closer to buying U.S. government bonds in a new front in its fight against the credit crisis and signaled unease over the risk of deflation with the economy weakening.

The U.S. central bank, battling the worst recession since World War Two, held its main interest rate in a range from zero to 0.25 percent and said it could stay unusually low for some time.

With no room to cut short-term rates, the Fed said it stood ready to buy long-term government debt if it felt it would help ease credit more broadly. Bond purchases could lower mortgage rates, helping to curb the housing downturn at the root of the global economy's ills.

Treasury debt investors were disappointed the Fed did not make a firm commitment to buy government bonds. U.S. government debt prices fell sharply, pushing the yield on the 30-year bond above 3.46 percent, the highest level since December 1.

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