Fed Says It Will Keep Key Interest Rate Near Zero Until Jobs Come Back

Fed to spend $45 billion to sustain bond purchasesBy MARTIN CRUTSINGER

WASHINGTON (AP) - The Federal Reserve sent its clearest signal to date Wednesday that it will keep interest rates super-low to boost the U.S. economy even after the job market has improved.

The Fed says it plans to keep its key short-term interest rate near zero at least until the unemployment rate drops below 6.5 percent and inflation rises to 2.5 percent. That plan adds detail to what the Fed had said before: that it expects to keep the rate low until at least mid-2015.

In a statement Wednesday after its final policy meeting of the year, the Fed also said it will keep spending $85 billion a month on bond purchases to drive down long-term borrowing costs and stimulate economic growth.

The Fed will spend $45 billion a month on long-term Treasury purchases to replace a previous bond-purchase program of an equal size. And it will keep buying $40 billion a month in mortgage bonds.

"The Fed has become more explicit and more transparent," said Steven Wood, chief economist at Insight Economics. "This should provide the markets with much more clarity around monetary policy action in the upcoming year."

With its new purchases of long-term Treasurys, the Fed's investment portfolio, which is nearly $3 trillion, would swell to nearly $4 trillion by the end of 2013 if its bond purchase programs remain in place.

All told, the policies are intended to help an economy that the Fed says is growing only modestly with 7.7 percent unemployment in November.

Stocks and bond yields rose after the Fed's statement was released. The Dow Jones industrial average was little changed just before the Fed news crossed at 12:30 p.m. Eastern time and jumped 69 points shortly after.

The yield on the benchmark 10-year Treasury note rose to 1.69 percent from 1.65 percent as investors sold ultra-safe investments and moved money into stocks.

"The Fed is aggressively trying to add to the economy's strength," said Jim O'Sullivan, chief economist at High Frequency Economics.

The Fed said it will continue the bond purchases until the job market improves substantially. It said it can pursue the aggressive stimulus programs because inflation remains below its target.

The statement was approved on an 11-1 vote. Jeffrey Lacker, president of Federal Reserve Bank of Richmond, objected for the eighth time this year.

The meeting was held against the backdrop of the looming "fiscal cliff," the sharp tax increases and spending cuts that will hit the economy in January if Congress and President Barack Obama are unable to reach an agreement this month to avert them.

Bernanke has said that the Fed's efforts will not be able to rescue the economy if the budget negotiations fail and the country does go over the fiscal cliff.

Fears of the cliff have led some U.S. companies to delay expanding, investing and hiring. Manufacturing has slumped. Consumers have cut back on spending. Unemployment remains elevated. If higher taxes and government spending cuts were to last for much of 2013, most experts say the economy would sink into another recession.

The latest bond-buying program would replace an expiring program called Operation Twist. With Twist, the Fed sold $45 billion a month in short-term Treasurys and used the proceeds to buy the same amount in longer-term Treasurys.

Twist didn't expand the Fed's investment portfolio, it just reshuffled the holdings. But the Fed has run out of short-term securities to sell. So to maintain its pace of long-term Treasury purchases and to keep long-term rates low, it must spend more and increase its portfolio.

The Fed's portfolio totals nearly $2.9 trillion - more than three times its size before the 2008 financial crisis.

The Fed has launched three rounds of bond purchases since the financial crisis hit. In announcing a third program in September, the Fed said it would keep buying mortgage bonds until the job market improved substantially.

Skeptics note that rates on mortgages and many other loans are already at or near all-time lows. So any further declines in rates engineered by the Fed might offer little economic benefit.

Inside and outside the Fed, a debate has raged over whether the Fed's actions have helped support the economy over the past four years, whether they will ignite inflation later and whether they should be extended.

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Tony

I really don't think this action is in the Fed's job description. The Fed is supposed to maintain price stability.
Unemployment, while not desireable, should not be his guiding light. Bernanke's policies are creating greater divide among classes with the rich getting richer (he's paying up for their assets) and the poor getting poorer
(he keeps driving savings and CD rates lower ) and yet allows financial institutions charge higher fees.
If I knew a Financial Lawyer who might be interested, I think these are some good grounds for a class action
Lawsuit.

December 13 2012 at 9:40 AM Report abuse rate up rate down Reply
.kowalski440mag

Is there anyone here who is familiar with the US Constitution? Isn't it Congress who has the right to borrow and spend money.......not the Fed? If so why isn't Bern. being challenged? He sounds like he's doing whatever he wants without any kind of approval. Is this possible? Hell....o maybe I can e-mail him to throw some free money (or ez $$$$$$$) my way-----only 7 $s, didn't want to seem greedy.

December 13 2012 at 7:46 AM Report abuse rate up rate down Reply
rjen164497

Wait a minute. What figures are they going to use? The true 37% of Americans who have no jobs or the phony figures put out every week?

December 13 2012 at 7:42 AM Report abuse rate up rate down Reply
ornamentalunltd2

Don’t trust them for one minute-- “We’re going over the cliff”— & the IRS---. We have been lied to for too many generations that people working in our government is finding it harder to come up with lies to cover up their other lies. Let’s see, What if we printed our own money? All the interest would be going back into our government. What a surprise!... Less Taxes to none, yet a better system…let’s see trillions of dollars to a privet banker OR back into our government witch is our freedom.
This would help stop this insanity….It seems to work with other countries…..O-yes---We’ve been borrowing money from most of them to covered the other lies… or was it that they needed some type of pay raise, maybe better healthcare, or was it a new something…lets not forget you voted to make changes?..But don’t worry it hasn’t work for generations so far…I’m sorry I’m sure there was one or two that work after all you might get too smart and catch on what’s going on…You must follow up during their meetings to make sure they fix it other wise they will do whatever they want and vote in a new rule or law without you…Lets not forget they seem to ignore our constitutional rights and keep on doing what they want to …
America needs to wake up… “We have become the enemy within”. WHY it’s the money..fix it and maybe we can get back as proud Americans.
As an American that the Federal Reserved is and has been implying it’s the USA Government without saying anything and the public going alone with it is very frighting.

December 13 2012 at 3:07 AM Report abuse rate up rate down Reply
vlady1000

Who would have ever imagined rates so low and for so long and still going. Good if you borrow, bad if you don't. I borrow a lot (own many student rentals) so this is saving me a lot and will for the next few decades. But my father and mother-in-law (81, and 75 years old) do not borrow. So I got them to invest in a few of the rentals. I manage and take care of them for free so they now a very good retrurn (thanks to the low rates mostly). It is the least I can do to help offset the low returns they are getting elsewhere. Just have to think out of the box and donate some of your free time.

December 13 2012 at 2:42 AM Report abuse rate up rate down Reply
Condley

All they have to do is get a few more unemployed to stop looking for jobs and they can raise interest rates. Great idea.

December 12 2012 at 10:41 PM Report abuse +1 rate up rate down Reply
Hi RON

Bernake does not consider the number of retirees who depend on interest to survive!! Feds say "until the jobs come back"??????????????? That might be a while !! I think Bernake has to go..he has actually done nothing but print money and help put us in debt. Ron Paul has the right idea.......audit this fool and see what the heck the fed is really doing to help the citizens.

December 12 2012 at 10:29 PM Report abuse rate up rate down Reply
dodie1990

Good jobs are not coming back, ever. Part-tier, minimum wage no benefit, no future Wal-Mart jobs are what is coming to an area near you. With no unions any jobs will be very low pay with no benefits. And the rate Bernanke is talking is only those whose unemployment compensatiuon has expired. Once you run out of benefits you are no longer comsidered unemployed. The real rate of unemployment with those whose benefits have expired and those part-time workers is about 15%.

December 12 2012 at 10:16 PM Report abuse +4 rate up rate down Reply
mariodinky661

due you think it is fair to senior and disabled people to live with no interest on their money? No interest means you burn through your savings and then qualify for welfare. How can we forget our seniors? Why save money with no interest and rising costs for food? They say we have no inflation so why is everything getting more expensive?

December 12 2012 at 9:57 PM Report abuse +6 rate up rate down Reply
crimeslawyer

This is nothing but a con game. The real reason they are keeping interest rates low is so they can pay back the national debt at below market rates. Zero interest rate is here to stay. Get used to it seniors. They don't care about you.

December 12 2012 at 9:53 PM Report abuse +3 rate up rate down Reply
1 reply to crimeslawyer's comment
Hi RON

Just heard on TV that 57 percent do not like the spending Obama is doing and was over 53per-cent who are upset with his tax proposal.. IF THAT IS THE CASE == EITHER THE ELECTION WAS CROOKED OR THERE ARE A LOT OF IDIOTS OUT THERE VOTING ONE WAY AND THINKING ANOTHER!!!!

December 12 2012 at 10:35 PM Report abuse +1 rate up rate down Reply
1 reply to Hi RON's comment
pdbliz

Ron,,,,There are alot of IDIOTS out there.!!!!!!!!!!!!!!!

December 13 2012 at 8:22 AM Report abuse rate up rate down