WASHINGTON – The Federal Reserve unleashed a series of bold and open-ended steps Thursday designed to stimulate the economy by boosting the stock market and making it cheaper for people to borrow and spend.
The Fed said it will spend $40 billion a month to buy mortgage bonds for as long as it deems necessary to make home
buying more affordable. It plans to keep short-term interest rates at record lows through mid-2015 – six months longer than previously planned. And it’s ready to try other measures if hiring doesn’t pick up.
The idea is to quicken the recovery, Chairman Ben Bernanke said at a news conference. But Bernanke made clear that he thinks the economy will need the Fed’s help even after the recovery strengthens.
Stock prices rose steadily after the Fed’s announcement at 12:30 p.m. The Dow Jones industrial average closed up more than 200 points. Other stock averages also surged.
The Fed’s policy committee announced the aggressive actions after a two-day meeting. Its moves pointed to how sluggish the U.S. and global economies remain more than three years after the recent recession ended.
Thursday’s announcement marked the Fed’s latest dramatic intervention since the financial crisis erupted in 2008 and the recession shot unemployment into double digits.
The Fed cut 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 Treasurys and mortgage bonds to try to drive down long-term rates.
Yet for all that, the U.S. economy is still struggling. The unemployment rate is 8.1 percent. And the Fed estimated Thursday that the rate will fall no lower than 7.6 percent in 2013.
The Fed’s latest actions come a week after the European Central Bank announced its most ambitious plan yet to ease Europe’s financial crisis by buying unlimited amounts of government bonds to help countries manage their debts.
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.
Asked at his news conference whether the Fed considered the impact of its actions on the presidential election, Bernanke said: We make our decisions based entirely on the state of the economy. ... We just don’t take those factors into account.
The Fed also lowered its outlook for economic growth this year, though it’s more optimistic about the next two years. It expects growth to be no stronger than 2 percent this year – down from its forecast of 2.4 percent in June.
It thinks the unemployment rate will be no lower than 6.7 percent in 2014. It also expects inflation to remain at or below 2 percent for three more years.
Bernanke made clear that higher stock prices are among the Fed’s goals in buying bonds. He noted that stock gains increase Americans’ wealth and typically lead individuals and businesses to spend and invest more.
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 Fed’s new bond purchases, which start today, amount to less per month than either of its first two bond programs.
But by committing to buying bonds indefinitely, the Fed is seeking to assure investors and consumers that borrowing will remain cheap far into the future.