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Tuesday, July 22, 2014         

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Fed to spend $40B a month on bond purchases

By Martin Crutsinger

AP Economics Writer

POSTED:



WASHINGTON » The Federal Reserve unleashed a series of bold and open-ended steps Thursday to stimulate the economy by making it cheaper for consumers and businesses to borrow and spend.

The Fed said it will spend $40 billion a month to buy mortgage bonds for as long as it deems necessary to make home buying more affordable. It plans to keep short-term interest rates at record lows through mid-2015 — six months longer than previously planned. And it's ready to take other unconventional steps if job growth doesn't pick up.

A statement from the Fed's policy committee said it thinks "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."

The committee announced the series of aggressive actions after a two-day meeting. Its moves pointed to how sluggish the economy remains more than three years after the Great Recession ended.

Stock prices rose on the news. 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 Dow Jones industrial average rose nearly 100 points shortly after the announcement at 12:30 p.m. Eastern time. The dollar dropped against major currencies. And the price of gold shot up about $16 an ounce, roughly 1 percent, to $1,750.

The statement was approved on an 11-1 vote. The lone dissenter was Richmond Fed President Jeffrey Lacker, who worries about igniting inflation.

The Fed's bond purchases have been intended to lower long-term rates to spur lending. The Fed has previously bought $2 trillion in Treasury bonds and mortgage-backed securities since the 2008 financial crisis.

Skeptics caution 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.

With less than eight weeks left 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.

The Fed is under pressure to act because the U.S. 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.

In August, job growth slowed sharply. Employers added just 96,000 jobs, down from 141,000 in July and well below what is needed to bring relief to the more than 12 million who are unemployed.

The unemployment rate did fall to 8.1 percent from 8.3 percent. But that was because many Americans stopped looking for work, so they were no longer counted as unemployed.

Fed Chairman Ben Bernanke spotlighted the problem of chronic high unemployment in a speech to an economic conference in Jackson Hole, Wyo., late last month. Bernanke argued that bond purchases and other unorthodox Fed actions had helped ease borrowing costs and boosted stock prices.

Higher stock prices increase Americans' wealth and confidence and typically lead individuals and businesses to spend more.







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