News Column

Federal Reserve Acts So More Americans Can Find Jobs

Sept. 14, 2012

Mark Davis, The Kansas City Star

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For the first time, the Federal Reserve on Thursday pledged aggressive aid for the economy until more Americans find jobs.

Policymakers -- with one vote of dissent -- vowed to buy bonds to hold down interest rates and use other policy tools so long as "the outlook for the labor market does not improve substantially," the Fed's announcement said.

"It's a Main Street policy. What we're about here is trying to get jobs going," Federal Reserve Chairman Ben Bernanke said at a news conference following the extensive policy announcements.

Previous Fed announcements have defined what the central bank planned to do to help the economy generally. For example, it would announce that it was lowering key interest rates outright or would buy several hundred billion dollars of bonds over a specific number of months.

On Thursday, the Fed said that its new commitment -- to buy $40 billion of mortgage bonds each month -- would persist until the job market showed sustained strength.

That commitment to a better job market exceeded most economists' expectations of what the presidentially appointed Fed governors and regional Federal Reserve bank presidents could agree to do.

Stock prices jumped on the Fed's policy moves. The Dow Jones industrial average gained 206.51 points, or 1.6 percent, to close at 13,539.86.

Experts had expected less from the Fed, in part because some Fed policy committee members -- including Kansas City Fed President Esther George -- publicly had questioned how much the Fed could help and how much an aggressive new round of action could increase future economic risks.

Bernanke acknowledged those doubts and the limit on the Fed's ability to lower the nation's 8.1 percent unemployment rate by itself.

"I personally don't think it's going to solve the problem," Bernanke said, a point he made several times.

He repeated previous pleas for Washington lawmakers to address the pending jump in taxes and drop in government spending set to begin on Jan. 1, which is generally described as a fiscal cliff. He has said the cliff, if allowed to play out, could send the economy back into a recession.

"I don't think our tools are strong enough to offset a major fiscal shock," Bernanke said.

But, he said, the Fed has tools that can support the recovery and feels compelled to use them.

Help for housing

The central bank's key new program specifically aims to help the housing industry, which has seen some improvement over its devastated levels during the recession.

The Fed said it would buy $40 billion of securities backed by mortgages every month and keep buying essentially until the job market showed sustained strength.

Buying the mortgage securities should help lower mortgage rates, which would make it easier and cheaper to refinance a mortgage or buy a new house. Indirectly, that could mean more home construction, higher house prices and more confident consumers -- and that could mean jobs.

Other steps the Fed is taking help lower corporate bond rates, too, which makes business expansion cheaper and more likely. Again, that could mean more jobs.

How many jobs, and at what risks, are open to much debate inside and outside the Fed.

Kansas City's George, for example, questioned in a speech last month whether anyone had held off buying a house or hiring a new employee because interest rates weren't quite low enough.

Mortgage rates already are at historically low levels. reported the average rate on a 30-year mortgage was 3.57 percent nationally and the rate on 15-year mortgages was 3.02 percent.

Some have argued that the Fed's commitments to hold down interest rates may lead some potential home buyers to keep shopping because they don't have to worry about rates jumping anytime soon.

George had said she weighed what seems a small potential benefit from additional bond purchases against genuine risks once the recovery is robust and the Fed needs to undo its strong recovery policies.

George participated in the sessions but did not have a vote in the policy decision, as the 11 regional Fed presidents share a limited number of votes on a rotation. She will vote on policy at next year's sessions.

Jeffrey Lacker, president of the Fed in Richmond, Va., dissented from the Fed's new policy actions. He had dissented in the five previous Fed decisions this year.

Economist Ryan Sweet had a more practical concern about the focus on housing.

"Because we are heading into the winter months, the boost to the housing market may be small at first," the senior economist at Moody's Analytics wrote in a note about the Fed announcement.

Open-ended pledge

The strength of the Fed's announcement stemmed not only from the additional bond buying but also from the open commitment to keep buying bonds.

In two earlier bond-buying programs, called quantitative easing by economists, the Fed set its target on buying several hundred billion dollars in bonds over a specific number of months.

The new commitment will have the Fed buying slightly fewer bonds each month, said Carl Tannenbaum, chief economist at Northern Trust in Chicago.

The $40 billion-a-month pledge, however, is unbounded. It could continue long enough to surpass pervious Fed bond-buying programs if employment doesn't recover, Tannenbaum said.

The Fed plans to continue buying the mortgage bonds until it sees sustained improvement in the job market and not merely "little wiggles in the numbers," Bernanke said.

Which numbers, he did not say. The Fed stopped short of setting a target for the unemployment rate, though some Fed members have advocated doing so. It targets a 2 percent inflation rate.

The Fed will watch the unemployment rate and other indications of job market strength.

Bernanke noted that unemployment had dipped slightly in August, but only because so many more Americans who are out of work stopped looking for jobs. It means they no longer count in the calculation of how many people are unemployed.

Bernanke said the number of people on payrolls, the percentage of Americans participating in the job market, the average hours worked, the amount of part-time hiring and other factors mattered, too.

A fresh employment report Thursday showed that the number of workers filing claims for unemployment had increased to its highest weekly level in nearly two months. The 382,000 first time claims in the week ended Sept. 8 exceeded the previous report by 15,000, the Labor Department said.

The long view

Thursday's policy statement also extended the Fed's commitment to hold its short-term key interest rate near zero. It earlier pledged to keep its zero interest rate policy in place until late 2014. It set mid-2015 as the new commitment.

The Fed also said it will continue an earlier policy called Operation Twist that targets lowering long-term interest rates generally. And it will reinvest money it earns from its existing mortgage bonds in new bonds.

Combined with the $40 billion, it means the Fed will buy $85 billion a month in long-term securities through the end of this year.

Economists variously described the collection of policy moves as "bold," "sweeping" and "aggressive."

But Bernanke sought to contain expectations about the effect they would have even while defending the Fed's actions so far as boosting the economy.

Forecasts released by the Fed's policy members Thursday showed little to no improvement in their expectations for unemployment next year. A central tendency of their forecasts for 2013 showed unemployment between 7.6 percent and 7.9 percent. The same forecasts in June were for unemployment between 7.5 percent and 8.0 percent next year.

Bernanke stressed the Fed would continue its unprecedented support even after the economy began to show greater resilience. The aim, he said, is to "give it time to make sure the recovery's well-established."

Source: (c)2012 The Kansas City Star (Kansas City, Mo.) Distributed by MCT Information Services

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