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Fed Will Shift Debt Holdings to Lift Growth

WASHINGTON — The Federal Reserve announced an unconventional plan on Wednesday to reduce borrowing costs for businesses and consumers, trying once more to spur economic growth despite urgings from Republicans that it refrain from any expansion of its stimulus program.

The Fed said that it would invest $400 billion in long-term Treasury securities over the next nine months, using money raised by selling its holdings of short-term federal debt, in an attempt to drive down interest rates on mortgage loans, corporate bonds and other forms of credit.

The Fed’s policy-making committee said in a statement that it was acting because it saw little prospect that the economy would expand fast enough and soon enough to help the 25 million Americans unable to find full-time work. It also said there was a significant risk that “strains in global financial markets” could further damage prospects for recovery.

“Growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions and the unemployment rate remains elevated,” the Fed said in the statement, which listed its reasons for worrying about the anemic condition of the American economy. “Household spending has been increasing at only a modest pace in recent months.”

The markets responded with mixed signals. Bond investors already had driven down interest rates in expectation of the Fed’s announcement, but rates fell further on Wednesday, reflecting a measure of surprise about the size of the plan. Investors in the stock markets appeared more concerned about the bleak outlook for the economy and Europe’s, as the major domestic indexes fell sharply.

Lower rates may encourage companies to invest in equipment and hire more workers, and consumers to start spending again on homes and cars and vacations. But tough lending standards are likely to limit the benefits. Loans already are cheap, but they are also hard to get.

“Only history will be able to gauge Fed Chairman Ben Bernanke’s success or failure,” Diane Swonk, chief economist at Mesirow Financial in Chicago, wrote in a note commenting on the committee’s decision. “No one will question his willingness to try.”

Three members of the 10-member Federal Open Market Committee dissented from the decision, just as they had with the committee’s last aid effort, in August, but their concerns did not seem to restrain the Fed’s chairman, Ben S. Bernanke. The committee’s statement noted only that they “did not support additional policy accommodation at this time.”

Republican politicians, meanwhile, reiterated their argument, put forth late Tuesday in a letter sent to the Fed from four Republican leaders, that the Fed’s efforts were not helping the economy and could have harmful consequences.

“I am absolutely convinced that the challenges in our economy are not a phenomenon that can be addressed by monetary policy,” said Representative Jeb Hensarling, a Texas Republican who is a member of the special deficit reduction committee.

Some liberals said the Fed had not done enough. “Today’s action by the Federal Reserve is not bold and will not create the millions of jobs that America needs,” said Senator Bernard Sanders, an independent from Vermont.

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Ben S. Bernanke, chairman of the Federal Reserve, which said it saw little prospect that the economy would expand quickly soon.Credit...Jonathan Ernst/Reuters

The new effort is an experiment without a direct precedent, although the Fed tried something similar in the 1960s. Essentially, the Fed hopes to drive down rates not by expanding its portfolio, as it has done twice in recent years, but by shifting its money into riskier long-term investments.

The Fed has amassed more than $1.6 trillion of federal debt. It said Wednesday that by June 2012 it would sell $400 billion in securities with remaining maturities of less than three years and buy roughly the same amount in securities with maturities longer than six years. It said the result would shift the average maturity of its holdings to 100 months, or more than eight years, from the current average of 75 months, or just over six years.

Separately, the Fed said it would maintain its investments in mortgage-backed securities at the current level of about $885 billion, ending a policy that had allowed the portfolio to shrink by $100 billion so far this year, to push down mortgage rates with particular force. While rates are already at record lows, reducing rates even further is the only tool available to the Fed.

Economists project the Fed’s efforts could reduce interest rates by a few tenths of a percentage point, a significant increment when multiplied by the vast extent of borrowing.

Macroeconomic Advisers, the St. Louis forecasting firm, estimated in advance of the Fed’s announcement — based on its best guess about the details of such a program — that the Fed’s efforts could add about 0.4 percentage points to economic output and create about 350,000 jobs over the next two years.

Other economists, however, predicted a smaller economic impact. They noted that lower interest rates so far had not produced the full measure of predicted benefits because lending standards remained unusually strict.

Most outstanding mortgages still carry interest rates above 5 percent, despite the availability of lower rates, because it remains difficult to refinance.

The Fed already is engaged in an enormous effort to stimulate growth. Most recently, the Fed announced in August that it intended to hold short-term interest rates near zero until at least the middle of 2013, extending a policy that has been in place since December 2008.

The central bank’s latest efforts are unfolding in an environment of heightened political pressures. As Democrats and Republicans battle over the role of government in improving the economy, both parties are seeking to influence the Fed’s decisions.

Republican presidential candidates have made criticism of the Fed a central theme of the early campaign.,

Some Democrats, meanwhile, have accused the central bank of being too cautious. Representative Barney Frank of Massachusetts, the ranking Democrat on the House Financial Services Committee, has proposed legislation that would remove the presidents of regional Federal Reserve banks from their seats on the policy-making committee. The 12 presidents of regional banks, who are elected in part by local businesses, now fill five seats on the committee on a rotating basis. The rest of the members of the policy-making committee are governors of the Federal Reserve board.

The regional bank presidents tend to be more concerned about inflation and less concerned about unemployment. Mr. Frank has described their participation as “undemocratic” and said it was impeding the Fed’s ability to pursue all the measures he considered necessary to support an economic recovery.

Jennifer Steinhauer contributed reporting.

A version of this article appears in print on  , Section A, Page 1 of the New York edition with the headline: Fed Will Shift Debt Holdings To Lift Growth. Order Reprints | Today’s Paper | Subscribe

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