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Wednesday, October 01, 2014         

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Fed takes bold steps in attempt to stimulate economy

Some see little benefit in a plan to purchase mortgage bonds and keep interest rates low

By Associated Press

POSTED:



WASHINGTON » Alarmed by the chronically weak U.S. economy, the Federal Reserve launched an aggressive new effort Thursday to boost the stock market and make borrowing cheaper for years to come.

And it made clear it won't stop there and is ready to try other stimulative measures if hiring doesn't pick up.

Stock prices rocketed up in approval. But economists said the Fed's plans to buy mortgage bonds for as long as it deems necessary and to keep interest rates at record lows until mid-2015 — six months longer than previously planned — might provide little benefit to the economy.

Chairman Ben Bernanke himself cautioned that the Fed's actions are no panacea for slow growth and high unemployment, and said the economy will probably need help even after the recovery strengthens.

"The idea is to quicken the recovery," Bernanke said at a news conference after the Fed lowered its outlook for growth this year.

As part of its bold and open-ended plan, the Fed said it would spend $40 billion a month to buy mortgage bonds to make home buying more affordable. That will be the third round of bond-buying in an effort to spur the economy, and the Fed left open the possibility of taking other steps to encourage borrowing and financial risk-taking.

Stock prices rose steadily after the Fed's announcement. The Dow Jones industrial average closed up more than 200 points, coming within 625 points — or 4.6 percent — of its all-time high.

The moves pointed to how sluggish the U.S. and global economies remain more than three years after the Great Recession ended.

Thursday's announcement marked the Fed's latest dramatic intervention since the financial crisis erupted in 2008 and the recession sent unemployment into double digits. The Fed cut its benchmark short-term rate to near zero and has kept it there for nearly four years. And it has bought more than $2 trillion in Treasuries and mortgage bonds to try to drive down long-term rates.

Yet for all that, the U.S. economy is still struggling. The unemployment rate is 8.1 percent. And the Fed estimated Thursday that the rate will fall no lower than 7.6 percent in 2013.

With less than eight weeks until election day, the economy remains the top issue on most voters' minds. Many Republicans have been critical of the Fed's continued efforts to drive interest rates lower, saying they fear it could ignite inflation.

Asked at his news conference 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 economic growth this year, though it was more optimistic about the next two years. It said it expects growth to be no stronger than 2 percent this year, down from its forecast of 2.4 percent in June.

It said it expected the unemployment rate to be no lower than 6.7 percent in 2014, with inflation remaining at or below 2 percent for three more years.

Bernanke made clear that higher stock prices are among the Fed's goals in buying bonds. Stock gains increase Americans' wealth, he noted, and typically lead individuals and businesses to spend and invest more.

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.






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