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US Federal Reserve announces plan to buy more debt to boost economy

Analysts were not surprised by the move which essentially amounts to so-called quantitative easing.

Federal Reserve Chairman Ben Bernanke speaks during a news conference in Washington today.
Federal Reserve Chairman Ben Bernanke speaks during a news conference in Washington today.
Image: Manuel Balce Ceneta/AP/Press Association Images

THE US FEDERAL Reserve announced a new $40 billion (€30bn) a month bond-buying program today aimed at cutting long-term interest rates as it slashed its 2012 growth forecast.

And it signaled, without setting a specific target, that monetary easing efforts would remain in place until it sees substantial improvement in the US jobs market, where 8.1 per cent of Americans remain unemployed.

Pointing to continued weak growth and stagnation in the jobs market, the Fed said it would spend $40 billion on agency mortgage-backed securities each month in an open-ended operation targeted at boosting the moribund housing sector.

That would take the US central bank’s total monthly purchases, including ongoing programs, to $85 billion a month, the Fed said.

These actions “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative,” it said.

The Federal Open Market Committee, the Fed’s policy board, also pledged to keep its benchmark rate at the current near-zero level through mid-2015, at least six months longer than its earlier commitment.

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” it said.

“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.”

‘Grave concern’

Fed chairman Ben Bernanke told reporters that the country’s employment situation remained a “grave concern,” adding: “The weak job market should concern every American.”

The FOMC said that the economy continues to expand at a “moderate” pace, but it pointed to a slowdown in investment by businesses.

It cut its forecast for growth this year to 1.7-2.0 percent from the previous 1.9-2.4 percent range, though it predicted a pickup to 2.5-3.0 percent in 2013.

The FOMC said it was “concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”

It also noted some vulnerability of the US economy to ongoing strains in global financial markets, a reference mainly to the ongoing eurozone crisis.

It said it expected inflation to remain under control, staying at or below the Fed’s 2.0 per cent target.

After months of debating whether to embark on new stimulus, most of the 12-member FOMC seemed to fall in line with Bernanke’s worries that little ground was being made on the high jobless rate.

Two weeks ago, Bernanke also called stagnation in the labor market a “grave concern,” warning that “persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”

Unsurprised analysts

Analysts were not surprised by the Fed’s moves which, said UniCredit’s Harm Bandholz, followed clearly from the central bank’s analysis of the pace and details of the economy’s growth.

“Many Fed officials preferred to act now in order to buy insurance against further downturns,” Bandholz added.

But he and others said that the impact was not likely to be significant, given external risks to the economy from Europe and China and the political stalemate over fiscal policy.

“Today’s monetary policy decision is unlikely to have any perceptible impact on the labor market and the US economy in general,” he said, as long as businesses are worried about the fiscal stalemate.

“Bernanke is marching US monetary policy even further into totally uncharted territory,” said John Ryding and Conrad DeQuadros and RDQ Economics.

“Our view is that these actions will do little to stimulate growth but will raise inflation expectations,” they said.

(c) AFP 2012

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