Friday, September 14, 2012

Fed to spend $40B a month on bond purchases

WASHINGON (AP) ? The Federal Reserve unleashed a series of aggressive actions Thursday intended to stimulate the still-weak economy by making it cheaper for consumers and businesses to borrow and spend.

The Fed said will spend $40 billion a month to buy mortgage-backed securities for as long as it deems necessary. It plans to keep short-term interest at record lows through mid-2015 ? six months longer than it previously had planned. And it's ready to take other unconventional steps if job growth doesn't pick up.

A statement from the Fed's policy committee said it thinks "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."

The committee announced the series of bold steps after a two-day meeting. Its actions pointed to how sluggish the economy remains more than three years after the Great Recession ended.

Stock prices rose on the news. But some economists said they thought the benefit to the economy would be slight.

"We doubt it will be enough to get the economy on the right track," said Paul Ashworth, an economist at Capital Economics. "It's only a matter of time before speculation begins as to when the Fed will raise its purchases from $40 billion a month."

The Dow Jones industrial average was up nearly 100 points shortly after the announcement at 12:30 p.m. Eastern time. The dollar dropped against major currencies, and the price of gold shot up about $16 an ounce, roughly 1 percent, to $1,750.

"If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability," the Fed said in a statement released after the meeting.

The statement was approved on an 11-1 vote. The lone dissenter was Richmond Fed President Jeffrey Lacker, who worries about igniting inflation.

The bond purchases are intended to lower long-term interest rates to spur borrowing and spending. The Fed has previously bought $2 trillion in Treasury bonds and mortgage-backed securities since the 2008 financial crisis.

Skeptics caution that further bond buying might provide little benefit. Rates are already near record lows. Critics also warn that more bond purchases raise the risk of higher inflation later.

With less than eight weeks left until Election Day, the economy remains the top issue on most voters' minds. Many Republicans have been critical of the Fed's continued efforts to drive interest rates lower, saying they fear it could ignite inflation.

The Fed is under pressure to act because the U.S. economy is still growing too slowly to reduce high unemployment. The unemployment rate has topped 8 percent every month since the Great Recession officially ended more than three years ago.

In August, job growth slowed sharply. Employers added just 96,000 jobs, down from 141,000 in July and well below what is needed to bring relief to the more than 12 million who are unemployed.

The unemployment rate did fall to 8.1 percent from 8.3 percent. But that was because many Americans stopped looking for work, so they were no longer counted as unemployed.

Source: http://news.yahoo.com/fed-spend-40b-month-bond-purchases-163255641.html

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