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Fed moves to boost weak US economy; stocks jump

PUBLISHED : Friday, 14 September, 2012, 3:25am
UPDATED : Friday, 14 September, 2012, 3:04pm
 

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

The Dow Jones industrial average shot up almost 240 points in response, reaching its highest point since the start of the Great Recession.

The central bank also extended a plan to keep short-term interest rates at record lows - close to zero - through mid-2015, or six months longer than it had planned. And it said it's ready to take other steps to boost the economy even after it strengthens under a "highly accommodative stance of monetary policy."

"The idea is to quicken the recovery," Chairman Ben Bernanke later told a news conference. But he made clear he thinks the economy will need the Fed's intervention even after the recovery strengthens, saying the country's employment situation "remains a grave concern." A new Fed forecast says it thinks unemployment, now at 8.1 percent, won't fall below 8 percent this year.

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.

A spokeswoman for Mitt Romney's presidential campaign said the Fed's latest efforts to boost the economy are "further confirmation that President Obama's policies have not worked."

Asked 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 growth this year, saying it now expects growth to be no stronger than 2 percent this year. That's down from its forecast of 2.4 percent in June.

The Fed's 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.

The bond purchases announced Thursday are intended to lower long-term interest rates to spur borrowing and spending. 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 will start Friday, amount to less per month than either of its first two bond programs.

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 is under pressure to act because the US economy is still growing too slowly to reduce high unemployment. The unemployment rate has topped 8 percent every month since the Great Recession officially ended more than three years ago.

"If the outlook for the labor 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 Fed's policy committee said in a statement released after the meeting.

The Fed also expressed concern 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 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.

Skeptics warned 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.

Still, some economists suggested that the Fed might continue to buy $40 billion a month in mortgage bonds for up to three years. That's how long some analysts expect it will take for the unemployment rate to dip below 7 percent, toward a "normal" rate of 6 percent or less. The rate is now 8.1 percent.

If the new bond buying lasts three years, Ashworth said it would add about $1.4 trillion to the Fed's purchases. That would be close to the $1.7 trillion the Fed spent in its first round of bond buying. That began in November 2008, at the height of the financial crisis, and ran until March 2010.

The Fed's second bond-buying program totaled $600 billion. It ran from November 2010 through June 2011.

 

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