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US Fed unveils $US400b stimulus plan
The West Australian US Fed unveils $US400b stimulus plan

The Federal Reserve redoubled its efforts to juice the US economy overnight, unveiling a $US400 billion ($A390.36 billion) stimulus plan and shunning political calls for the bank to take a back seat.

The Fed's top policy panel unleashed the latest in a battery of tools aimed at rekindling the troubled US economy, this time moving to make mortgages and borrowing cheaper by pushing down long-term interest rates.

In a plan dubbed "Operation Twist," the Fed said it would switch bonds in its huge portfolio with a maturity of less than three years to bonds with a maturity of six to 30 years.

The move would not involve printing any more money, but supporters say it could lower rates and prod cash-rich banks to put their idle reserves to work

Amid criticism that the Fed has become too interventionist, the Fed pointed to an economic recovery buckling under high unemployment and a protracted housing crisis.

"Economic growth remains slow," the Federal Open Market Committee statement said.

"Recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated."

The size of the Fed's plan surprised some economists, including Joel Naroff of Naroff Economic Advisors.

"You either go all in at this point or fold your cards and Mr Bernanke has gone all in," he said.

But the plan also thrusts the Fed to the centre of Washington's acrid party politics, an uncomfortable place for an institution which zealously guards its independence from the White House, Treasury and Congress.

In a rare push to shape Federal Reserve policy, top Republican leaders in the US Congress warned Fed chief Ben Bernanke in a letter released Tuesday against new steps to boost the ailing US economy.

Republican House Speaker John Boehner, House Majority Leader Eric Cantor, Republican Senate Minority Leader Mitch McConnell and his top deputy Senator Jon Kyl sent the unusual message on Monday.

"We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the US economy," they wrote.

"We submit that the board should resist further extraordinary intervention in the US economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people."

After the decision, Republican presidential hopeful Jon Huntsman insisted it was a bad move.

"We can't stimulate our way to prosperity. We must earn it by creating a tax and reg (regulatory) environment conducive to job growth," he said via Twitter.

There were signs Wednesday that view had traction even within the bank.

Uncommonly, three of the Fed's policy panel 10 members dissented because, according to the Fed, they "did not support additional policy accommodation at this time".

All three are understood to have greater worries about unleashing high inflation than boosting economic growth.

Whether the plan now succeeds will be a major test of the bank and chairman Ben Bernanke's monetary policy acumen.

Many economists have questioned whether the Fed - after three years of firing shots of liquidity into the economy - has much ammunition left.

"Most think it will do little to help the economy, but that the Fed is obligated to do what it can," said economist Chris Low of FTN Financial.

The initial impact was to push 10-year bond prices to close to their lowest-ever levels, but the longer-term impact was still questioned.

"The 'twist' might keep 10-year rates 10-20 basis points below where they otherwise might have been, but interest rates are already extremely low," said Nigel Gault, chief US economist with IHS Global Insight.

"A few more basis points lower does not transform the outlook. And the biggest risks right now, in Europe, are ones that only European policymakers can address.