Dec 12, 2012 / 10:39 am
The Federal Reserve will spend $45 billion a month to sustain an aggressive drive to keep long-term interest rates low. And it says it plans to keep a key short-term rate near zero until unemployment drops below 6.5 per cent.
The policies are intended to help an economy that the Fed says is growing only modestly with 7.7 per cent unemployment in November.
Stocks and bond yields rose after the Fed's statement was released Wednesday after its final policy meeting of the year. The Dow Jones industrial average was little changed just before the Fed news crossed at 12:30 p.m. Eastern time and jumped 69 points shortly after.
The yield on the benchmark 10-year Treasury note rose to 1.69 per cent from 1.65 per cent as investors sold ultrasafe investments and moved money into stocks.
"The Fed is aggressively trying to add to the economy's strength," said Jim O'Sullivan, chief economist at High Frequency Economics.
The Fed said it will direct the money into long-term Treasurys to replace an expiring bond-purchase program. The new purchases will expand its investment portfolio, which has reached nearly $3 trillion.
The central bank will continue buying $40 billion a month in mortgage bonds. All told, its monthly bond purchases will remain $85 billion. They are intended to reduce already record-low long-term rates to encourage borrowing and accelerate growth.
The Fed said it will continue the bond purchases until the job market improves substantially. It said it can pursue the aggressive stimulus programs because inflation remains below its target.
The Fed also kept its target for its benchmark short-term interest rate at a record low near zero, where it has been for the last four years. The Fed said Wednesday that it would link any future rate change to lower unemployment, as long as inflation is expected to stay below 2.5 per cent.
Before Wednesday, the Fed had said it planned would keep the rate low until at least mid-2015.
The statement was approved on an 11-1 vote. Jeffrey Lacker, president of Federal Reserve Bank of Richmond, objected for the eighth time this year.
The meeting was held against the backdrop of the looming "fiscal cliff," the sharp tax increases and spending cuts that will hit the U.S. economy in January if Congress and President Barack Obama are unable to reach an agreement this month to avert them.
Bernanke has said that the Fed's efforts will not be able to rescue the economy if the budget negotiations fail and the country does go over the fiscal cliff.
Fears of the cliff have led some U.S. companies to delay expanding, investing and hiring. Manufacturing has slumped. Consumers have cut back on spending. Unemployment remains elevated. If higher taxes and government spending cuts were to last for much of 2013, most experts say the economy would sink into another recession.
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