The Federal Reserve announced Wednesday that it will take unprecedented steps to bolster the economy, saying it will continue to stimulate growth until the unemployment rate falls to 6.5 percent or the inflation rate reaches 2.5 percent. It was a historic move that for the first time explicitly spells out the Fed’s goals for the nation’s economy and how it will respond to changing conditions.
The Fed says it will also begin buying $45 billion in Treasury bonds a month, on top of $40 billion a month it is already buying in mortgage bonds. The measures come as the nation braces for a possible recession if Congress and the White House don’t reach a deal to avert a series of tax hikes and major spending cuts set to go into effect at the end of the year.
Gallery
The U.S. economic recovery dominated headlines this year. Here’s a look at 2012’s other major business news.
The statement, coming after a two-day meeting of the Fed’s policy committee, amounts to a major new commitment to trying to reduce unemployment. But also shows that Fed officials remain concerned about the long-term prospects for the U.S. economy. The actions are likely to stimulate economic activity — because they suggest that the central bank will be boosting growth for perhaps years to come — and markets jumped on the announcement.
The economy is facing an imminent risk of going over the so-called fiscal cliff at the end of the year, as negotiations between the White House and House Republicans on a deal have hit gridlock. The Fed’s move Wednesday shows that, though officials cannot offset the hit from going off the cliff, they will try to do as much as possible.
“The Committee remains concerned that ... economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the Federal Open Markets Committee, the Fed’s policymaking body, said in a statement. “Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. “
The Fed noted that unemployment is still too high, despite a recent drop in the jobless rate in November, and that growth in business investment has slid.
Previously, the Fed said it would keep its benchmark interest rate near zero until at least mid-2015. Now, the central bank will maintain those rates “for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
In particular, it said it plans to keep interest rates ultra low until the unemployment rate, currently at 7.7 percent, reaches 6.5 percent, and until near-term inflation expectations, as measured by financial markets, do not exceed 2.5 percent a year. The Fed’s long-term inflation target remains 2 percent.
In embracing numeric policy targets, the Fed is reflecting a transformation in how it has approached its job under Chairman Ben S. Bernanke.
Traditionally, the central bank has offered very little public information about how it planned to intervene in the market. Since taking the helm, Bernanke has pushed officials to allow the central bank to be more open on policy plans.
In September, the Fed broke new ground by announcing a virtually unlimited commitment to take steps to heal the weak economy and that it would consider specific economic targets for those stimulus efforts.
“In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments,” the Fed said then. “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
The Fed’s decision to purchase more Treasury bonds comes as a similar program is winding down. Since June, the Fed has been buying $45 billion in long-term Treasury securities while at the same time selling an equivalent amount in short-term Treasury securities. The operation had stimulative effects, though they did not add to the Fed’s balance sheet.
The Fed’s new Treasury purchases will add to the Fed’s total holdings of Treasury securities and therefore are likely pack more punch.
Bernanke will address the fiscal cliff in a press conference at 2:15 p.m. Wednesday. The Fed will also release its updated projections for the economy.
The only member of the Fed’s board opposing the move was Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond.
The Fed says it will also begin buying $45 billion in Treasury bonds a month, on top of $40 billion a month it is already buying in mortgage bonds. The measures come as the nation braces for a possible recession if Congress and the White House don’t reach a deal to avert a series of tax hikes and major spending cuts set to go into effect at the end of the year.
Gallery
The U.S. economic recovery dominated headlines this year. Here’s a look at 2012’s other major business news.
The statement, coming after a two-day meeting of the Fed’s policy committee, amounts to a major new commitment to trying to reduce unemployment. But also shows that Fed officials remain concerned about the long-term prospects for the U.S. economy. The actions are likely to stimulate economic activity — because they suggest that the central bank will be boosting growth for perhaps years to come — and markets jumped on the announcement.
The economy is facing an imminent risk of going over the so-called fiscal cliff at the end of the year, as negotiations between the White House and House Republicans on a deal have hit gridlock. The Fed’s move Wednesday shows that, though officials cannot offset the hit from going off the cliff, they will try to do as much as possible.
“The Committee remains concerned that ... economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the Federal Open Markets Committee, the Fed’s policymaking body, said in a statement. “Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. “
The Fed noted that unemployment is still too high, despite a recent drop in the jobless rate in November, and that growth in business investment has slid.
Previously, the Fed said it would keep its benchmark interest rate near zero until at least mid-2015. Now, the central bank will maintain those rates “for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
In particular, it said it plans to keep interest rates ultra low until the unemployment rate, currently at 7.7 percent, reaches 6.5 percent, and until near-term inflation expectations, as measured by financial markets, do not exceed 2.5 percent a year. The Fed’s long-term inflation target remains 2 percent.
In embracing numeric policy targets, the Fed is reflecting a transformation in how it has approached its job under Chairman Ben S. Bernanke.
Traditionally, the central bank has offered very little public information about how it planned to intervene in the market. Since taking the helm, Bernanke has pushed officials to allow the central bank to be more open on policy plans.
In September, the Fed broke new ground by announcing a virtually unlimited commitment to take steps to heal the weak economy and that it would consider specific economic targets for those stimulus efforts.
“In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments,” the Fed said then. “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
The Fed’s decision to purchase more Treasury bonds comes as a similar program is winding down. Since June, the Fed has been buying $45 billion in long-term Treasury securities while at the same time selling an equivalent amount in short-term Treasury securities. The operation had stimulative effects, though they did not add to the Fed’s balance sheet.
The Fed’s new Treasury purchases will add to the Fed’s total holdings of Treasury securities and therefore are likely pack more punch.
Bernanke will address the fiscal cliff in a press conference at 2:15 p.m. Wednesday. The Fed will also release its updated projections for the economy.
The only member of the Fed’s board opposing the move was Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond.