Federal Reserve

Federal Reserve to spend US$45 billion to sustain bond purchases

PUBLISHED : Thursday, 13 December, 2012, 1:48am
UPDATED : Thursday, 13 December, 2012, 7:34am

The Federal Reserve will keep interest rates super-low to boost the U.S. economy even after the job market has improved significantly.

The Fed says it plans to keep its key short-term rate near zero at least until the unemployment rate drops below 6.5 per cent — as long as expected inflation remains no more than 2.5 per cent. Unemployment is now 7.7 per cent. Annual inflation is about 2 per cent.

That plan adds detail to what the Fed had said before: that it expects to keep the rate low until at least mid-2015.

In a statement after its final policy meeting of the year, the Fed also said it will keep spending US$85 billion a month on bond purchases to drive down long-term borrowing costs and stimulate economic growth.

The Fed will spend US$45 billion a month on long-term Treasury purchases to replace a previous bond-purchase programme of an equal size. And it will keep buying US$40 billion a month in mortgage bonds.

“The Fed has become more explicit and more transparent,” said Steven Wood, chief economist at Insight Economics. “This should provide the markets with much more clarity around monetary policy action in the upcoming year.”

With its new purchases of long-term Treasurys, the Fed’s investment portfolio, which is nearly US$3 trillion, would swell to nearly US$4 trillion by the end of 2013 if its bond purchase programmes remain in place.