Fed begins quantitative easing

The US Federal Reserve has embarked on a policy of quantitative easing, following the lead of the Bank of England, in a new attempt to shore up America's economy.

The Fed said that it would purchase up to $300bn of Treasury bonds over the next six months. The radical action is designed to drive down interest rates and jump-start growth by pump what is effectively newly created money into the economy.

It is the first time that such a step has been taken since the early 1960s, when the Fed ran "Operation Twist" under President Kennedy.

The announcement appeared to pay off as prices for Treasury bonds soared, causing a sudden drop in their benchmark yields – which help set market interest rates. Prices for 10-year bonds leapt by four full points, pushing their yield down by 0.5 per cent.

However, the initial success was offset by a report from the International Monetary Fund which predicted that US GDP would shrink by 2.8 per cent this year.

The central bank also unveiled even bigger plans to buy up mortgage-backed debt, to try and end the US housing collapse. The Fed will now spend $1.45tr on such debts and will consider expanding another $1tr scheme to buy up bonds linked to lending on cars, education, credit cards, and businesses.