Fed Unveils Bold, Open-Ended Steps to Aid Economy

Ben BernankeBy MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON (AP) - The Federal Reserve unleashed a series of bold and open-ended steps Thursday designed to stimulate the economy by boosting the stock market and making it cheaper for people to borrow and spend.

The Fed said it will spend $40 billion a month to buy mortgage bonds for as long as it deems necessary to make home buying more affordable. It plans to keep short-term interest rates at record lows through mid-2015 - six months longer than previously planned. And it's ready to try other stimulative measures if hiring doesn't pick up.

"The idea is to quicken the recovery," Fed Chairman Ben Bernanke said at a news conference Thursday. But he made clear he thinks the economy will need the Fed's intervention even after the recovery strengthens.

Stock prices rose steadily after the Fed's announcement. The Dow Jones industrial average climbed more than 200 points by midafternoon Eastern time.

The Fed's policy committee announced the aggressive actions after a two-day meeting. Its moves pointed to how sluggish the U.S. and global economies remain more than three years after the Great Recession ended.

The actions come a week after the European Central Bank announced its most ambitious plan yet to ease Europe's financial crisis by buying unlimited amounts of government bonds to help countries manage their debts.

With less than eight weeks left until Election Day, the economy remains the top issue on most voters' minds. Many Republicans have been critical of the Fed's continued efforts to drive interest rates lower, saying they fear it could ignite inflation.

Asked at his news conference whether the Fed considered the impact of its actions on the presidential election, Bernanke said: "We make our decisions based entirely on the state of the economy... We just don't take those factors into account."

The Fed on Thursday also lowered its outlook for economic growth this year, though it's more optimistic about the next two years. It expects growth to be no stronger than 2 percent this year. That's down from its forecast of 2.4 percent in June.

It still thinks the unemployment rate won't fall below 8 percent this year. The rate is now 8.1 percent. It estimates it will fall as low as 7.6 percent next year and 6.7 percent in 2014. It also expects inflation to remain at or below 2 percent for three years.

At his news conference, Bernanke made clear that higher stock prices are among the Fed's goals in buying bonds. Bernanke noted that stock gains increase Americans' wealth and typically lead individuals and businesses to spend and invest more.

But some economists said they thought the benefit to the economy would be slight.

"We doubt it will be enough to get the economy on the right track," said Paul Ashworth, an economist at Capital Economics. "It's only a matter of time before speculation begins as to when the Fed will raise its purchases from $40 billion a month."

The statement was approved 11-1. The lone dissenter was Richmond Fed President Jeffrey Lacker, who worries about igniting inflation.

The Fed's bond purchases have been intended to force down long-term rates to spur lending. The Fed has previously bought $2 trillion in Treasury bonds and mortgage-backed securities since the 2008 financial crisis.

The new purchases, which will start Friday, amount to less per month than either of its first two bond programs. But by committing to buying bonds indefinitely, the Fed is seeking to assure investors and consumers that borrowing will remain cheap far into the future.

"In many ways, today's actions represent the beginning of a new phase in Bernanke's efforts to get the economy moving again," said Michael Feroli, an economist at JPMorgan Chase Bank.

Some economists suggested that the Fed might continue to buy $40 billion a month in mortgage bonds for up to three years. That's how long some expect it will take for the unemployment rate to dip below 7 percent, toward a "normal" rate of 6 percent or less.

If the new bond buying lasts three years, Ashworth said it would add about $1.4 trillion to the Fed's purchases. That would be close to the $1.7 trillion the Fed spent in its first round of bond buying, which began in November 2008, at the height of the financial crisis. It ran until March 2010.

The Fed's second bond-buying program totaled $600 billion. It ran from November 2010 through June 2011.

Still, skeptics caution that further bond buying might provide little economic benefit because rates are already near record lows. Critics also warn that more bond purchases raise the risk of higher inflation later.

A spokeswoman for Mitt Romney's presidential campaign said the Fed's latest efforts to boost the economy are "further confirmation that President Obama's policies have not worked."

The Fed is under pressure to act because the U.S. economy is still growing too slowly to reduce high unemployment. The unemployment rate has topped 8 percent every month since the Great Recession officially ended more than three years ago.

In August, job growth slowed sharply. Employers added just 96,000 jobs, down from 141,000 in July and well below what is needed to bring relief to the more than 12 million who are unemployed.

The unemployment rate did fall to 8.1 percent from 8.3 percent. But that was because many Americans stopped looking for work, so they were no longer counted as unemployed.

Bernanke spotlighted the problem of chronic high unemployment in a speech to an economic conference in Jackson Hole, Wyo., late last month. He argued that bond purchases and other unorthodox Fed actions had helped ease borrowing costs and boosted stock prices.

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bobnpath

more debt for recovery? same old Rx isn't it? I suspect this is not a waise move, but an election year
vote getting spending spree more than decent fiscal policy.

September 15 2012 at 6:27 AM Report abuse rate up rate down Reply
Gary

where were the feds for the last four years and why is it only now,that sudden moves are being made???Could it be election time????

September 14 2012 at 6:52 PM Report abuse +1 rate up rate down Reply
percheron1

Well the market doesn't agree with your gloom and doom...Dow Jones Climbs 206 Points On Fed Stimulus News

September 13 2012 at 11:17 PM Report abuse +2 rate up rate down Reply
2 replies to percheron1's comment
jdykbpl45

S-it floats.

September 14 2012 at 7:28 AM Report abuse -2 rate up rate down Reply
bobnpath

probably too early to base anything on market. keep eye on it. and what sectors bounced? probably those in the recieving end of this largesse? Also, market may not translate to street and street
is where policy is needed...although in general terms is good to see market moving up...it may not
be best indicator for ths policy move.

September 15 2012 at 6:30 AM Report abuse rate up rate down Reply
frank1946

QE 3 has arrived.....................USA is Greece !

Total Debt can never be repaid in constant $$$.

Either Inflation or Insovency......................what a mess.

1 % Growth is negative Growth in reality. Obama Depression is getting worse.

September 13 2012 at 11:13 PM Report abuse +1 rate up rate down Reply
jelloquest

Suprise, suprise. This is aan election year and the liberals talk about all the new jobs under Obama. Of course anybody that has a brain knows that our Pres is lying. Now, to help the econmy, the Feds are flooding the nation with more money, bringing down interest rates even more. So much for investing for retirement. And of course this will help Obama but hurt this nation even more. I wish I hadn't read this article because I'm going to be sick for the next few days.

September 13 2012 at 9:22 PM Report abuse +2 rate up rate down Reply
Tom

Inflation is not an issue, since nobody has anything to spend and their credit is already bad.

Unemployment is falling since people have given up looking for jobs.

Yes, pump $40M per month into the mortgage/bond sectors (isn't that part of what took the country down 4 years ago), stimulate the markets, make it look like we are on the road to recovery. Re-Elect!!!!

And blame it all on the Republicans!

September 13 2012 at 7:54 PM Report abuse +1 rate up rate down Reply
PATRICK

TYPICAL MORONIC PLAN SANCTIONED BY OBLAMA AND CZARS OF DREAMLAND!

September 13 2012 at 7:29 PM Report abuse rate up rate down Reply
Somey

t_trevor

someonedumb, entertain us with more of the incredible ignorance that randomly flows through the empty space between your ears.

Flying pig tales of Republican control of the House and Senate when Obama assumed office is really good stuff, but we know you have more stupidity to share!
=======================================================================
Thanks for sharing your stupidity.

September 13 2012 at 7:16 PM Report abuse +2 rate up rate down Reply
Somey

Mitt still refuses to disclose his tax returns; I wonder what Mitt is hiding?

September 13 2012 at 5:43 PM Report abuse -7 rate up rate down Reply
dus48

just another game being played to fool everyone.and we are being fooled for sure.just keep on printing .and keep giving more aid to people who hate us.no security for the great individuals who serve this great nation.being killed.where was the intel? how could this happen?has any media outlet asked these qustions.no.they are so busy on the campaign trail.totally appalling.

September 13 2012 at 5:26 PM Report abuse +6 rate up rate down Reply