SALON

Thursday, Sep 13, 2012 7:07 PM UTC

Fed makes moves to stimulate economy

The Federal Reserve is making bold moves to quicken economic recovery

By

Topics: Federal Reserve, Ben Bernanke, U.S. Economy, Stimulus, economy, Mortgage Crisis,

Fed makes moves to stimulate economy(Credit: AP)

WASHINGTON (AP) — The Federal Reserve unleashed a series of bold and open-ended steps Thursday to stimulate the economy by making it cheaper for consumers and businesses 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.

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.

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.

Stock prices surged steadily after the Fed’s announcement. The Dow Jones industrial average rose more than 230 points two hours after the announcement at 12:30 p.m. Eastern time.

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 Fed’s new bond 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.

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.

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.”

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 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.

More Martin Crutsinger.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • A missing poster hangs on a tree outside the Cleveland home of Amanda Berry Wednesday. Berry and two other women, Michelle Knight and Gina DeJesus, made a daring escape this week after being held captive for more than a decade.
    Credit: AP/Tony Dejak

  • Elvis Rafael Rodriguez and Emir Yasser Yeje offer their best impression of  Eric B. & Rakim. On Thursday, New York prosecutors identified the pair as members of an international gang that robbed $45 million in a matter of hours by hacking into a database of prepaid debit cards and draining ATM machines around the world.
    Credit: AP

  • New Jersey Gov. Chris Christie walks to a podium during the groundbreaking ceremony for the Technology Enhanced Accelerated Learning Center at Essex County Newark Tech in Newark, N.J., Tuesday. Christie made less flattering headlines this week after undergoing a secret stomach surgery to curb his weight.
    Credit: AP/Julio Cortez

  • Workers stand outside the Tung Hai Sweater Ltd. factory in Dhaka, Bangladesh, Thursday after a fire broke out in its 11-story building. Eight people were killed in the blaze.
    Credit: AP/Ismail Ferdous

  • Workers rescue a woman trapped for 17 days in the rubble of a garment factory building in Saver, Bangladesh, Friday. The building's collapse was the worst industrial disaster in the country's history, killing more than 1,000 people.
    Credit: AP

  • Former South Carolina Gov. Mark Sanford gives his victory speech Tuesday in Mt. Pleasant, S.C., after winning back his old congressional seat in the state's first district.
    Credit: AP/Rainier Ehrhardt

  • Jodi Arias reacts in Maricopa Country Superior Court Wednesday after being found guilty of first-degree murder in the gruesome killing of her one-time boyfriend, Travis Alexander. Arias has subsequently said she wants the death penalty, claiming she'd "prefer to die sooner than later."
    Credit: AP/The Arizona Republic/Rob Schumacher

  • Ariel Castro stands for his mug shot Thursday at the Cuyahoga County Corrections Center, where he is being held on $8 million bail. The former bus driver is accused of imprisoning three young women and beating them repeatedly over a period of 10 years.
    Credit: AP/Cuyahoga County

  • Charles Ramsey addresses the media Monday after helping rescue three women held captive in Cleveland for more than a decade. Ramsey's hero portraiture has been complicated by revelations of his own domestic violence record.
    Credit: AP/The Plain Dealer/Scott Shaw

  • Michael B. Donley, Secretary of the Air Force, testifies during a Senate Appropriations Defense Subcommittee hearing on Capitol Hill Wednesday. The military branch was rocked this week after its chief sexual assault prevention officer was charged with sexual battery.
    Credit: AP/Carolyn Kaster

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 21 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

follow salon

Most Read

Popular on Reddit

links from salon.com

From Around the Web

Presented by Scribol
listener_new_rect The Listener: So long, Sookie Stackhouse

Recommendations