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Fed renews stimulus efforts, ties interest rates to jobless rate

December 12, 2012|By Don Lee
  • The Fed, headed by Ben S. Bernanke, has tied its latest stimulus effort to the unemployment rate.
The Fed, headed by Ben S. Bernanke, has tied its latest stimulus effort to… (Getty Images )

WASHINGTON -- The Federal Reserve, maintaining its aggressive efforts to stimulate a slow-growing economy burdened by high unemployment, said it would continue its large-scale bond-buying programs in the new year and, for the first time, announced explicit unemployment- and inflation-rate targets for when the central bank would raise interest rates.  

Top Fed policymakers, at the end of their last meeting of the year Wednesday, left short-term interest rates near zero and said they were now likely to keep them there until the jobless rate fell to 6.5% or lower and the medium-term outlook for inflation exceeded 2.5%. Previously, the Fed had said it was unlikely to raise its benchmark interest rate until at least mid-2015.

The change reflects a dramatic evolution of the central bank’s communications policies, and it is intended to give the marketplace greater confidence about how long interest rates will remain exceptionally low.

The U.S. unemployment rate was 7.7% in November, down from 8.1% in August. Many economists say the unemployment rate could go back up closer to 8% in coming months, and the Fed’s most recent projections -- which is to be updated later Wednesday -- doesn’t see the jobless rate falling below 6.5% until 2015.  

Fed officials, as expected, also announced Wednesday that they would continue buying $40 billion of mortgage-backed securities and $45 billion of long-term Treasury bonds a month. The purchases are aimed at driving down borrowing costs to spur spending, investment and hiring. The Fed launched the purchase of mortgage-backed securities in September to give a boost to the housing market, which Fed policymakers said Wednesday "has shown further signs of improvement."

In continuing the buying of long-term Treasury bonds, the Fed converted a program, which was set to expire at the end of this month, in order to sustain the stimulus. Fed officials previously said they would continue their bond-purchase efforts until the job market "improved substantially" -- and they reaffirmed that pledge Wednesday.

The Fed statement made little change in its assessment of what has been a weak recovery. Officials said economic activity has continued to grow moderately in recent months. And they noted in Wednesday’s release that employment also has expanded at a moderate pace.

Later Wednesday, Fed policymakers are to release their new projections for economic growth, unemployment and inflation. The statement made no mention of the so-called fiscal cliff of impending federal budget cuts and tax hikes, but Fed Chairman Ben S. Bernanke is expected to address the issue and answer other questions from journalists at his quarterly news conference later in the day.

Economic growth accelerated in the third quarter to an annual rate of 2.7%, from 1.3% in the second quarter. But most of the third-quarter expansion came from a temporary boost in federal defense spending and a buildup of business inventory, while consumer spending weakened and business investment for equipment and software dropped for the first time since spring 2009.

Macroeconomic Advisers, in its latest update to its economic forecast on Tuesday, projected that fourth-quarter growth would fall to a skimpy rate of 0.6%.


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