Fed May Dedicate More Than $1 Trillion to Boost Economy

Updated from 3:03 p.m. EDT

Federal Reserve policymakers said Wednesday that they will dedicate more than $1 trillion in new funds to restore the health of the U.S. economy, sending stocks higher and Treasury yields plunging.

The Federal Open Market Committee, wrapping up a two-day meeting, said in a statement that it plans to further support mortgage lending and the housing market. To do that, the Fed will buy up to $750 billion more of agency mortgage-backed securities, such as those issued by Fannie Mae ( FNM) and Freddie Mac ( FRE), bringing its overall purchases to as much as $1.25 trillion this year.

Additionally, the Fed could double its acquisitions of agency debt in 2009, which would take the total as high as $200 billion, and in order to help the stalled credit markets the central bank will buy up to $300 billion of longer-term Treasury securities over the next six months.

Stocks surged after the comments from the FOMC were released. The Dow Jones Industrial Average had been showing a loss, but it rallied quickly to a triple-digit gain and closed up 90.88 points, or 1.2%, at 7486.58.

Longer-dated Treasuries moved up sharply in price, sending yields lower. The 10-year note, which was up 17/32 to yield 3% before the announcement, was rising 4-10/32, yielding 2.51%, around 4 p.m. EDT. The 30-year bond, up 1-6/32 and yielding 3.8% earlier in the day, was gaining 5-16/32 to yield 3.51%.

The dollar dropped on the news, and commodities, including gold, erased their losses and surged ahead.

Not surprisingly, the FOMC left its fed funds target range unchanged at 0% to 0.25%. The committee said in a statement that information it has received since its last meeting in January indicated that the economy has continued to decline and that the fed funds rate could be kept "exceptionally low" for an extended period.

"Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," the statement read. "Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession."

The FOMC said that even though the near-term economic outlook is weak, it "anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth."

Inflation, the committee believes, "will remain subdued." There is a chance that inflation "could persist for a time below rates that best foster economic growth and price stability in the longer term."

Financials and housing stocks were among the winners of the day in the wake of the Fed's moves. Citigroup ( C) rose 22.7% to $3.08, and Bank of America ( BAC) was up 22.3% to $7.67. Wells Fargo ( WFC) added 17.5% at $17.22.

Lennar ( LEN) was up 9.6% to $9.34, and Toll Brothers ( TOL) gained 5.7% to $18.04. D.R. Horton ( DHI) was better by 7.7% at $9.07.