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Fed to tie interest rate to job gains

The hope is to bring unemployment below 6.5%. Strategy marks a dramatic change in policy, made easier by low inflation lately.

December 13, 2012|Don Lee and Jim Puzzanghera

The Fed would consider other labor market indicators, besides the jobless and inflation rates, before making a change in interest rate policy, Bernanke said. Those would include measures of people involuntarily working part time and those without work for six months or longer.

Analysts are much more divided, however, on whether the Fed's continuing bond purchases were good for the economy.

If the Fed were to buy $85 billion worth of bonds every month next year, by essentially printing money, the central bank would add $1 trillion to its assets on top of about $2 trillion expanded to its balance sheet since the recession.

Many analysts fear that such expansion in the financial system will spark higher inflation down the road.

"They're doing something that's never been done before and they don't fully know the consequences," said Paul Edelstein, director of financial economics at IHS Global Insight. "How is the Fed going to get out of this situation? How will it sell into the market without disrupting the market?"

Although the Fed's bond buying will put more downward pressure on mortgage rates, which could help the housing market and the broader economy, Edelstein pointed out that home-loan rates already are at historic lows, leaving little room for further declines.

The Fed on Wednesday slightly upgraded its forecast for the jobless rate while leaving its broader projections for economic growth and inflation little changed.

In its quarterly update, the Fed said the unemployment rate would be 7.4% to 7.7% at the end of 2013, down from its previous September forecast of 7.6% to 7.9%.

The Fed projected that the economy would grow 2.3% to 3% in 2013, compared with its September projection of 2.5% to 3%. Growth in 2014 would be 3% to 3.5%, compared with a September forecast of 3% to 3.8%.

Inflation is expected to remain at 2% or less continuously through 2015.

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don.lee@latimes.com

jim.puzzanghera@latimes.com

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