Citing concerns about a moribund labor market, the Federal Reserve announced new steps on Thursday to jolt the sluggish economy, hoping that it can spark new hiring by expanding a controversial effort to purchase mortgage bonds.
In a statement ahead of a planned news conference by Federal Reserve Chairman Ben Bernanke, the Fed said it would expand the ongoing programs to purchase mortgage bonds, a process called quantitative easing, by $40 billion a month through years end.
The Fed also will continue through at least years end its previously announced efforts to extend the average maturity of the securities it holds, swapping out short-term debt for longer-term debt in hopes of pushing down the lending rates for consumers looking to purchase homes, condos or automobiles. It also will reinvest proceeds from debt that matures, meaning that the combined efforts will add about $85 billion a month for the rest of the year to the Feds balance sheet.
Importantly, the Fed left these efforts open-ended, leaving open the possibility that they would continue well into next year or beyond.
The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions, the Fed statement said. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.
In another small step to boost the economy, the Fed changed the language in the statement that accompanies each of its meetings.
It told investors that it now expected its exceptionally low benchmark federal funds rate which influences the prime rate banks charge consumers and businesses to remain at a range between zero and a quarter of a percentage point through the end of 2015.
Prior statements had anticipated that the low rate which hit its record low in December 2008 would stay there until the end of 2014. This shows financial markets that the Fed is willing to take extraordinary measures to help the U.S. economy recover its lost footing.
The Feds action Thursday comes amid a heated political campaign, and while Bernanke was first appointed by Republican President George W. Bush, many Republicans dont want the autonomous Fed to take any additional steps, since its balance sheet has swelled to nearly $3 trillion. GOP presidential nominee Mitt Romney has said he wont reappoint the chairman when Bernankes term expires in 2014. Romneys running mate, Rep. Paul Ryan, R-Wis., publicly called on Bernanke last week to halt further bond purchases.
Congressional Democrats welcomed the action and took the opportunity to jab at their opponents across the aisle.
The Fed is fulfilling its obligation to take action to address unemployment. Now congressional Republicans need to fulfill theirs, Sen. Charles Schumer, D-N.Y., a member of the Senate Banking Committee, said in a statement.
Republican Rep. Jeb Hensarling of Texas, the vice chairman of the House Financial Services Committee, fired back:
There is no clearer indication than todays Fed action that after three and a half years, the presidents economic policies continue to fail, Hensarling said. The president has already benefited from the largest monetary stimulus in our history, and it just became larger. It is regrettable that the presidents failed policies have compelled the Fed to take further unprecedented action to expand the monetary base.
The idea behind the aggressive purchase of Treasury and mortgage bonds, called quantitative easing, is to force investors out of safe bets and into risk-taking that supports economic activity. This happens because the Feds purchases drive the return on investment in bonds so low that investors seek better profits from stocks, corporate bonds, commodities and other investments.
Many economists have questioned whether this third round of announced bond purchases will bring diminishing returns. The Fed thinks not, determining that an unemployment rate at 8.1 percent stuck there or higher since February 2009 is unacceptable and threatens long-term economic damage.
The jobless rate has come down 2 full percentage points from its financial-crisis high of 10.1 percent. But it remains elevated compared with where it had been for much of the 1990s until the Great Recession, a period that began in December 2007 and ended in June 2009. The economy has grown in fits and starts since then, held back in part by a global slowdown and a debt crisis in Europe, along with the United States, an engine of world economic growth.
The Feds new bond buy-in was supported by all members of the rate-setting Federal Open Market Committee except Jeffery Lacker, the president of the Federal Reserve Bank of Richmond. Hes opposed for months any additional asset purchases or inclusion of language promising exceptionally low levels for the federal fund rates for an extended period.
The Fed also released its updated economic forecast Thursday, changing it only slightly from its June projections. The Fed now expects economic growth this year to be 1.7 percent to 2 percent, down from its central tendency forecast, which exclude the three highest and three lowest projections, of 1.9 percent to 2.4 percent in June. Its view on the unemployment rate remained unchanged, at 8 percent to 8.2 percent.
The one notable change in its forecast came in what Federal Open Market Committee members view as the appropriate timing to begin raising interest rates again, with most members now expecting that to happen in 2015 at the earliest.