News Column

Fed Announces Stimulus; Ties Benchmark to Employment

Dec. 12, 2012
Federal Reserve

The US Federal Reserve on Wednesday announced plans to increase economic stimulus efforts, saying it would buy more securities to bolster the U.S. economy, while, for the first time, tying its benchmark interest rate directly to the unemployment rate.

The central bank said it would purchase long-term Treasury securities next year at a pace of 45 billion dollars per month, replacing an earlier programme known as Operation Twist, in which the bank had swapped short-term Treasuries for long-term debt in an effort to keep the balance sheets unchanged. The new effort will expand its balance sheets.

The Fed will also continue a programme announced in September to buy 40 billion dollars in mortgage-backed securities each month.

The Fed indicated it would keep its benchmark interest rate at historic lows of 0 to 0.25 per cent until unemployment falls below 6.5 per cent. Unemployment stood at 7.7 per cent in November.

The bank also tied the interest rate to inflation, saying it would need a forecast of inflation at no more than half a percentage point above the long-term goal of 2 per cent for one to two years in order to consider raising rates.

The Fed has previously given target dates for potentially raising the interest rate. At its October meeting it said rates would stay at historic lows until at least 2015.

"The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the Federal Open Market Committe said in a statement announcing the moves.

US economic activity and employment have improved at "a moderate pace" since the Fed last met in October, but it noted unemployment remains elevated, despite seeing declining since the summer. Business spending has slowed even as household spending and the housing market have improved.

The central bank said it would continue its stimulus efforts unless the jobs outlook improves "substantially." It also left open the possibility of taking other steps.

The U.S. economy is threatened by looming steep austerity measures due to go into effect at the end of the year if Congress and President Barack Obama cannot agree to more gradual measures to replace them.

Federal Reserve Chairman Ben Bernanke is expected to address the so-called fiscal cliff among other issues in a press conference later Wednesday.

The Fed is also due to release forecasts for economic growth for next year ahead of Bernanke's remarks.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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