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Thursday, September 13, 2012

Fed Announces New Round of Bond Buying to Spur Growth


WASHINGTON — The Federal Reserve opened a new chapter Thursday in its efforts to accelerate the economic recovery, saying that it would expand its holdings of mortgage-backed securities, and potentially undertake other new policies, until unemployment drops sufficiently or inflation rises too fast.


Manuel Balce Ceneta/Associated Press

Ben S. Bernanke, the Fed chairman, last month made the case for the bank to act again.

The Fed said that it will add $23 billion of mortgage bonds to its portfolio by the end of September and then announce its plans for October as part of a new process that aims to prioritize the Fed’s economic objectives.

The Fed also said, in a statement following a meeting of its policy-making committee, that it now expects to hold short-term interest rates near zero until at least mid-2015, extending the forecast it made in January by about half a year.

The statement said that the economy had continued to expand “at a moderate pace,” but that the Fed had concluded “growth might not be strong enough to generate sustained improvement in labor market conditions.”

That has been true for months, perhaps years, but implicit in the statement was the Fed’s conclusion that the situation was no longer acceptable. Eleven members of the committee voted for the action; Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented, as he has at each meeting this year.

The Fed said that its actions “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

The scale of the new effort is significantly smaller than the Fed’s previous rounds of asset purchases. The Fed purchased about $100 billion in securities each month during those campaigns. It said Thursday that it would target a rate of about $40 billion a month during the current campaign, although unlike those earlier efforts, the volume is now subject to adjustment.

The new purchases will mark the first time in more than two years that the Fed has expanded its holdings of mortgage bonds. That decision reflects the Fed’s view that the housing market still needs help, and that lower rates on mortgage loans could provide significant benefits for the broader economy.

Seeking to increase the impact of its new policies, the Fed also said Thursday that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

The language is intended to make clear that this latest intensification does not solely reflect the Fed’s increased concern about the economy, but also reflects an increased determination to make a more forceful response. It suggests that the Fed is willing to tolerate somewhat higher inflation later to encourage stronger recovery in the coming months, something it once insisted was unthinkable but has gradually come to consider a necessity in order to revive the economy.

The Fed had given unusually clear indications in recent weeks that it was ready to act. An account of its last meeting, published in mid-August, suggested action was imminent unless the economy showed “substantial and sustainable” improvement.

A few weeks later, Mr. Bernanke spoke of his “grave concern” about the high rate of unemployment and said that in his judgment, the likely benefits of additional action outweighed the potential costs. A number of longtime observers of the central bank said they could not recall a Fed chairman using stronger language.

Since then, the economy has shown little evidence of substantial improvement. The government estimated last week that employers added only 96,000 jobs in August, and other economic indicators have been similarly lackluster.

Fed officials focused on two options in response: expanding the scope of its current efforts by purchasing more securities, or extending the duration by promising to maintain those efforts beyond the end of 2014.

Read More:
http://www.nytimes.com/2012/09/14/business/economy/fed-announces-new-round-of-bond-buying-to-spur-growth.html?emc=na



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