Learning from history

United States Federal Reserve chairman Ben Bernanke has moved the central bank further into uncharted policy territory in combating joblessness by tying the bank's interest rate outlook to unemployment and inflation, while committing its balance sheet to an even faster expansion.

The actions on the eve of the Fed's centenary year underscore Bernanke's hallmark commitment to experimentation and forceful action, derived in part from his research showing too little monetary stimulus produced large economic costs for the US in the 1930s and for Japan in the 1990s.

He called the current state of the labour market, with unemployment at 7.7 per cent, "an enormous waste of human and economic potential" and said the benefits of more bond buying outweighed the potential risks, including stoking inflation.

"Bernanke is pulling out all the stops to kick this economy back into a higher gear," said Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi UFJ. "They are buying everything in sight - treasuries, mortgage-backed securities - and will keep rates low until everyone who wants a job has one."

Bonds fell as news broke of potential higher inflation, after policymakers boosted their main stimulus tool by adding US$45 billion of monthly treasury purchases to an existing programme to buy US$40 billion in mortgage debt a month. That decision puts the Fed's US$2.86 trillion balance sheet on track to reach almost US$4 trillion by the end of next year.

Central bankers have now for the first time linked their interest rate outlook to economic thresholds, saying rates will stay low "at least as long" as unemployment remains above 6.5 per cent and if the Fed projects inflation of no more than 2.5 per cent one or two years in the future.

Fed officials do not see joblessness falling near that goal until 2015. Interest rates are expected to stay low until at least the middle of 2015.