On Thursday, the US Federal Reserve unveiled a series of bold and flexible steps designed to stimulate the economy. The action is expected to boost the stock market and enable more people to borrow and spend.
The Fed said it will invest $40 billion a month in mortgage bonds for as long as it considers it necessary to make home buying in the US cheaper. It intends to keep short-term interest rates at record lows through mid-2015. If hiring doesn’t increase, the government is ready to try other stimulative measures.
Chairman Ben Bernanke said at a news conference that the aim of all that was to accelerate the recovery. However, he believes the economy will need the Fed’s help even after the recovery.
Stock prices advanced after the Fed’s announcement at 12:30 p.m. ET. The Dow Jones industrial average closed up more than 200 points. Other stock averages also soared.
The moves of the Fed’s policy committee showed how sluggish the U.S. and global economies still are, even though the Great Recession reportedly ended more than three years ago.
Thursday’s announcement pointed out the latest interference of the Fed since the financial slump started in 2008 and unemployment reached double digits not only in America, but within the most of the developed countries. The Fed downgraded its benchmark short-term rate to near zero and has kept it there for nearly four years. And it’s bought more than $2 trillion in Treasuries and mortgage bonds in attempts to lower long-term rates.
However, the U.S. economy is still troubled. The unemployment rate is officially 8.1 percent and the Fed said that the rate will not drop lower than 7.6 percent in 2013.
The latest actions followed the introduction of the European Central Bank’s bold plan to ease Europe’s financial crisis by buying unlimited amounts of government bonds.
The economy is still the top issue on most voters’ minds since there are less than eight weeks left until Election Day. Many Republicans have been critical of the Fed’s unceasing attempts to lower interest rates because they are afraid that it could result in inflation.
On Thursday, the Fed also cut its outlook for economic growth this year, despite the fact that it’s more optimistic about the next two years. It foresees growth to be below 2 percent this year. It also expects the unemployment rate to be no lower than 6.7 percent in 2014 and predicts inflation to remain at or below 2 percent for three more years.
According to Bernanke, higher stock prices are among the Fed’s goals in purchasing bonds. He pointed that stock gains boost Americans’ wealth and usually make individuals and businesses spend and invest more.
However, Paul Ashworth, an economist at Capital Economics, says that this won’t be enough for the economy to recover completely.
The ability of the Fed to boost home buying might be limited even if its bond purchases lead to lower mortgage rates.
While the U.S. housing market is in a better condition, it hasn’t recovered completely. Some economists predict that sales of previously occupied homes will reach about 4.6 million. That’s well below the 5.5 million “healthy” annual sales pace.
Bernanke himself tried to lower expectations about how much the Fed’s intervention might help the economy and said that monetary policy was not a “panacea”.
The statement of the Fed was approved 11-1.
The new bonds that will be bought by the Fed amount to less per month than either of its first two bond programs. Nevertheless, by committing to purchasing bonds indefinitely, the Fed is trying to assure investors and consumers that borrowing will remain affordable into the far future.
According Michael Feroli, an economist at JPMorgan Chase Bank, the latest moves represent a new phase in Bernanke’s attempts to help the economy.
Some economists said that the Fed might continue to purchase $40 billion a month in mortgage bonds for up to three years because many believe that for that period of time the unemployment rate will fall below 7 percent.
Ashworth noted that if the new bond buying continues for three years it would add about $1.4 trillion to the Fed’s purchases. That would be close to the $1.7 trillion the Fed invested its first round of bond buying.
The second bond-buying programof the Fed amounted to $600 billion. It ran from November 2010 through June 2011.
However, skeptics warn that more bond purchases might provide only slight economic benefit because rates are almost record low. They also noted that bond buying might ignite higher inflation later.
The Fed has to do something because the U.S. economy is still recovering too slowly to reduce high unemployment. The unemployment rate has surpassed 8 percent every month since the Great Recession officially ended.
In August, job growth slowed dramatically. The unemployment rate indeed dropped to 8.1 percent from 8.3 percent. However, that was because many Americans gave up looking for work, so they were no longer counted as unemployed.
Bernanke emphasized the problem of high unemployment in a speech to an economic conference in Jackson Hole, Wyo., late last month. He claimed that bond buying and other Fed actions had lowered borrowing costs and increasing stock prices.
