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US Federal Reserve extends low interest rates
Central bank has announced it will spend $40bn a month to buy mortgage-backed securities, so as to stimulate economy.
Last Modified: 13 Sep 2012 23:57

The Federal Reserve has announced bold steps to stimulate the still-weak US economy and reduce high unemployment, saying it will spend $40bn a month to buy mortgage-backed securities for long as necessary.

"We're not sure what the economic effects of this programme will be, it should help growth and employment on the margin"

- Dan Greenhaus,
Chief global strategist at BTIG LLC

The US central bank also extended a plan to keep short-term interest rates at record lows through mid-2015. And it said it is ready to take other steps to boost the economy even after it strengthens.

Chairman Ben Bernanke was scheduled to hold a news conference at 18:30 GMT, shortly after the Fed releases its economic forecast at 18:00 GMT.

Thursday's actions pointed to how sluggish the US economy remains more than three years after the Great Recession ended. With less than eight weeks left until the presidential election, the economy remains the top issue on most voters' minds.

The Fed announced the steps after its two-day policy meeting ended.

The bond purchases are intended to lower long-term interest rates to spur borrowing and spending.

Rise in stocks

Stocks rose after the announcement. The Dow Jones industrial average was up 15 points for the day just before 16:30 GMT. It surged by 105 points within minutes of the announcement, then gave up some gains to be just 35 points higher.

The dollar dropped against major currencies, and the price of gold shot up about $16 an ounce, roughly one per cent, to $1,750.

"We're not sure what the economic effects of this programme will be, it should help growth and employment on the margin," Dan Greenhaus, chief global strategist at BTIG LLC, said in a research note.

Investors had been expecting action from the Fed after Bernanke said in a speech last month that persistently weak hiring remains "a grave concern" that inflicts "enormous suffering."

The Fed expressed concern on Thursday about overseas markets but did not mention Europe or China, two regions that help drive the global economy but are struggling.

"Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook," the Fed said in a statement released after the meeting.

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At home in the US, "If the outlook for the labour 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 statement said.

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

The Fed has previously bought $2tn in Treasury bonds and mortgage-backed securities since the 2008 financial crisis.

Sceptics warn 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.

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 US economy is still growing too slowly to reduce high unemployment.

The unemployment rate has topped eight per cent 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 fell to 8.1 per cent from 8.3 per cent, but that was because many Americans stopped looking for work, so they were no longer counted as unemployed.

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Source:
Agencies
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