A trader works on the floor of the New York Stock Exchange as Fed Chairman… (Spencer Platt / Getty Images )
WASHINGTON — The Federal Reserve took its strongest step to date to try to bolster the sluggish U.S. job market, launching a new stimulus program aimed at firing up one of the economy's long-idled engines: the housing market.
The central bank said it would immediately start buying billions of dollars of mortgage-backed securities — essentially bonds that are made up of a bunch of home loans, packaged and then sold to investors.
And in an unexpected move, the Fed left the program open-ended and said it was prepared to do even more "if the outlook for the labor market does not improve substantially."
The Fed's hope is that heavy intervention in the real estate market would push already historically low mortgage rates down further for a longer period, spurring refinancing activity and home sales.
Although many analysts doubt this new round of bond buying will have a big effect on the economy — even Fed Chairman Ben S. Bernanke repeatedly cautioned against expecting too much — the central bank's statement Thursday sent stocks soaring to fresh multiyear highs.
The Dow Jones industrial average and the Standard & Poor's 500 index reached their highest levels since December 2007, and the tech-laden Nasdaq composite index saw its highest close since November 2000.
The Fed also extended its pledge to keep short-term interest rates near zero through the middle of 2015, another effort to entice businesses to step up hiring.
"The employment situation … remains a grave concern," Bernanke said at a news conference Thursday shortly after the Fed issued its policy statement and downgraded its outlook for economic growth this year. "While the economy appears to be on a path of moderate recovery, it isn't growing fast enough to make significant progress reducing the unemployment rate."
The jobless rate has been stuck above 8% since the start of the year, and the Fed's new forecast doesn't see that changing any time soon. Bernanke would not give a specific level of unemployment that the Fed was targeting but said: "We're looking for something that involves unemployment coming down in a sustained way."
Bernanke has been hinting for weeks that more bond-buying was likely to come. But it wasn't a certainty given there are some signs of a pickup in the economy, dissension inside the Fed boardroom and considerable political pressure from congressional Republicans not to do anything more.
GOP presidential nominee Mitt Romney was among those who have voiced opposition to further monetary stimulus for the economy. Republican lawmakers repeatedly have warned of the risks of igniting inflation and asset bubbles, and they strongly opposed the Fed's announcement Thursday.
Romney said the Fed plan showed that President Obama's economic policies aren't working. The Republican candidate reiterated that, if elected, he would not reappoint Bernanke as Fed chairman when his term expires in early 2014.
"I think printing more money, at this point, comes at a higher cost than the benefit it's going to create," Romney said in an interview with ABC's George Stephanopoulos.
Bernanke, in response to a question that the timing of the action could be construed by some as helping Obama, insisted that the election was no factor in the Fed's decision.
"On the politics, we have tried very, very hard, and I think we've been successful, at the Federal Reserve to be nonpartisan and apolitical," he said. "We make our decisions based entirely on the state of the economy and the needs of the economy for policy accommodation, so we just don't take those factors into account."
Adding to the controversy is the nature of the new bond-buying program itself. In opting to buy mortgage-backed securities instead of Treasury bonds, which were the focus of its second round of quantitative easing, the Fed is targeting a specific sector: the housing market.
Some inside and outside the Fed have questioned whether such sector-specific policy action was appropriate for the central bank because such moves are seen as the province of Congress and the president.
"Is it monetary policy or fiscal policy?" asked Dean Croushore, a former Fed economist who is currently an economics professor at the University of Richmond. "They're favoring the housing industry over other industries.... What's the limit of that? It's kind of a dangerous place for the Fed to be in."
More significantly for the economy, the main question is: How much punch will the new stimulus have?
Under the plan, the Fed would begin buying $40 billion worth of mortgage-backed securities a month. Combining the new bond buying with previously existing programs, the Fed said it would increase the central bank's holdings of longer-term securities about $85 billion a month through the end of the year.