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Fed unveils bold, open-ended steps to aid economy

By Martin Crutsinger

Associated Press

Published: Thursday, Sept. 13 2012 1:25 p.m. MDT

Federal Reserve Chairman Ben Bernanke speaks during a news conference in Washington, Thursday, Sept. 13, 2012, following the Federal Open Market Committee meeting to present the FOMC's current economic projections and to provide additional context for the FOMC's policy decision.

Manuel Balce Ceneta, Associated Press

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WASHINGTON — The Federal Reserve unleashed a series of bold and open-ended steps Thursday designed to stimulate the economy by boosting the stock market and making it cheaper for people 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 try other stimulative measures if hiring doesn't pick up.

"The idea is to quicken the recovery," Fed Chairman Ben Bernanke said at a news conference Thursday. But he made clear he thinks the economy will need the Fed's intervention even after the recovery strengthens.

Stock prices rose steadily after the Fed's announcement. The Dow Jones industrial average climbed more than 200 points by midafternoon Eastern time.

The Fed's policy committee announced the aggressive actions after a two-day meeting. Its moves pointed to how sluggish the U.S. and global economies remain more than three years after the Great Recession ended.

The 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.

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.

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 on Thursday also lowered its outlook for economic growth this year, though it's more optimistic about the next two years. It expects growth to be no stronger than 2 percent this year. That's down from its forecast of 2.4 percent in June.

It still thinks the unemployment rate won't fall below 8 percent this year. The rate is now 8.1 percent. It estimates it will fall as low as 7.6 percent next year and 6.7 percent in 2014. It also expects inflation to remain at or below 2 percent for three years.

At his news conference, Bernanke made clear that higher stock prices are among the Fed's goals in buying bonds. Bernanke noted that stock gains increase Americans' wealth 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. "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 statement was approved 11-1. The lone dissenter was Richmond Fed President Jeffrey Lacker, who worries about igniting inflation.

The Fed's bond purchases have been intended to force down 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.

The new purchases, which will start Friday, amount to less per month than either of its first two bond programs. But by committing to buying bonds indefinitely, the Fed is seeking to assure investors and consumers that borrowing will remain cheap far into the future.

"In many ways, today's actions represent the beginning of a new phase in Bernanke's efforts to get the economy moving again," said Michael Feroli, an economist at JPMorgan Chase Bank.

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