Fed rolls out new plan for recovery
The Federal Reserve announced on Wednesday that it will take unprecedented steps to bolster the economy, saying it will continue to stimulate growth until the unemployment rate falls to 6.5 percent or the inflation rate reaches 2.5 percent. The Fed said it does not expect unemployment to reach that benchmark until 2015.
It was a historic move that for the first time explicitly spells out the Fed's goals for the nation's economy and how it will respond to changing conditions.
The Fed says it will begin buying $45 billion in Treasury bonds per month, on top of $40 billion per month it is buying in mortgage bonds. The measures were announced as the nation braces for a possible recession if Congress and the White House do not reach a deal to avert a series of tax increases and major spending cuts set to go into effect at the end of the year.
The statement, announced after a two-day meeting of the Fed's policy committee, amounts to a new commitment to try reducing unemployment. But it also shows that Fed officials remain concerned about the long-term prospects for the economy. The actions are likely to stimulate economic activity because they suggest the central bank will be boosting growth for at least two years — and markets jumped on the announcement. But stocks began losing gains by midafternoon as Fed Chairman Ben Bernanke began his usual news conference after the Fed released its statement and economic projections. The Dow Jones industrial average was nearly flat by the end of the question-and-answer session at 3:30 p.m., and the Standard & Poor's 500-stock index was up only 0.3 percent, dropping from a 0.7 percent high in the early afternoon.
The economy is at risk of going over the fiscal cliff at the end of the year as negotiations between the White House and House Republicans on a deal have hit an impasse. The Fed's move shows that, though officials cannot offset the hit from going off the cliff, they will try to do as much as possible.
Bernanke warned of serious ramifications for the economy if the year-end tax increases and spending cuts take effect.
“If the economy actually went off the fiscal cliff ... that would have adverse effects on the unemployment rate,” Bernanke said. “I don't buy the idea that a short-term descent off the fiscal cliff would not be costly. I think it would be costly, and I think we're seeing those costs.” He cited volatile markets and low figures on consumer sentiment and business investment.
The resolution, Bernanke said, is in the hands of the nation's leaders, not the Fed. “I don't think the Federal Reserve has the tools to upset that event,” he said. “The most helpful thing that Congress and administration can do at this point ... is to find a solution and avoid derailing the recovery,” he said, adding later that he believes Congress will come up with a way to avoid that economic shock.
Before Bernanke's news conference, the central bank released its economic projections, lowering expectations for gross domestic product from its last forecast in September but predicting the unemployment rate would drop a bit faster. The Fed does not expect the jobless rate to fall to 6.5 percent or lower until 2015 and expects inflation to remain 2 percent during that time.
The Fed noted that unemployment is still too high, despite a recent drop in the jobless rate in November, and that growth in business investment has slid.
Previously, the Fed said it would keep its benchmark interest rate near zero until at least mid-2015. Now the central bank will maintain those rates “for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
In particular, it said it plans to keep interest rates ultra low until the unemployment rate — 7.7 percent — reaches 6.5 percent, and until near-term inflation expectations, as measured by financial markets, do not exceed 2.5 percent a year. The Fed's long-term inflation target remains 2 percent.
In embracing numeric policy targets, the Fed is reflecting a transformation in how it has approached its job under Bernanke.
Traditionally, the central bank has offered very little public information about how it planned to intervene in the market.
Since taking the helm, Bernanke has pushed officials to allow the central bank to be more open on policy plans.
Responding to the Fed statement, Rep. Kevin Brady of Texas, the top Republican on the congressional Joint Economic Committee, said the Fed's decision to expand its quantitative easing by purchasing long-term Treasury bonds is, “a continuation of unnecessary and dangerous monetary policy to make up for failed fiscal policy” that will produce the same result — “a slow, irregular recovery hampered by the White House's obsession with higher taxes, oppressive regulation and a unworkable new health care law.”