The U.S. Federal Reserve said it will buy government debt for the first time since the 1960s as part of an extra $1 trillion injection into the ailing economy, buoying government bonds and denting the dollar.
Wall Street and Asian stocks climbed after the Fed's surprise decision on Wednesday to buy up to to $300 billion of longer term U.S. government debt over the next six months and expand an existing scheme to buy mortgage related securities by another $850 billion, to $1.45 trillion this year.
The Fed, which has already brought its benchmark interest rate to near zero, had said it was considering buying long-term Treasuries, but few Fed watchers had expected it to follow Japan and Britain in pumping money directly into the economy so soon.
"This is a pretty dramatic move," said James Caron, head of global rates research at Morgan Stanley in New York. "They are trying to bring down all consumer rates."
U.S. home mortgage rates fell toward record lows around 5.00 percent, Treasury bond yields dropped by the biggest one-day margin since the 1987 stock market crash and the S&P 500 benchmark stock index spiked up by 2.1 percent.
The sharp drop in U.S. bond yields pushed the dollar to a two-month low of $1.3536 against the euro on Thursday.
SOME SECURITY
Asian markets followed on Thursday, with Japanese bond futures spiking to their highest since March 3, and Asia-Pacific stocks outside Japan climbed 1.7 percent to a five-week high.
"U.S. authorities are quick to tackle problems, showing their commitment to helping markets and the financial sector recover fast," said Terushi Hirotama, head of trading at Ichiyoshi Securities in Japan. "This is providing investors with some sense of security."
Japan stocks trailed though, with exporters hit by the drop in the dollar against the yen.
Oil prices also climbed more than 2 percent to above $49 a barrel, spurred by optimism that aggressive Fed action will help pull the U.S. economy out of a crippling recession.
The Fed has said that the recovery also hinged on the success of a $700 billion rescue of the battered U.S. financial sector. The scheme, however, has been dogged this week by public outrage over bonuses offered by insurer AIG, one of the main recipients of the government bailout.
AIG Chief Executive Edward Liddy tried to appease angry lawmakers on Wednesday, saying he had asked employees to repay some of the bonus money.
The Fed's move to add direct government bond buying to its expanding arsenal of unconventional weapons came hours after the Bank of Japan boosted its government bond purchases plan for this year by nearly a third to $219 billion.
WELCOME HELP
The Bank of England started buying government bonds with newly created money on March 11 to revive the world's fifth-largest economy, which in February saw the biggest ever jump in the number of people claiming jobless benefits.
While the Japanese central bank said it would buy more debt to merely "smooth market operations," the government on Thursday welcomed the Fed and the Bank of Japan moves as timely help that should cap long-term borrowing costs, under pressure from government fiscal stimulus plans.
"It will clearly curb a rise in long-term interest rates, having a favourable effect on rates not only on government debt but also on corporate bonds," Finance Minister Kaoru Yosano told a news conference after a cabinet meeting.
All three central banks have already pushed interest rates near to zero and were looking for unorthodox ways of getting funds flowing to companies and consumers to battle the worst global downturn since the 1930s Great Depression.
Of all major economies, Japan was hit hardest by the collapse in global trade, and a monthly Reuters survey of Japanese manufacturers confirmed the dire state of the world's No.2 economy, with its sentiment gauge hitting a record low in March.
While Japan gears for its longest ever downturn, the Fed, in its assessment of the U.S. economy, dropped any specific reference to the likelihood of the recession ending this year, which it had suggested earlier.
Instead it only said that the near-term outlook was weak and stimulus measures should lead to a gradual resumption in growth.
