The Fed’s steps were in many ways remarkable: For the first time, it made a definitive promise that it would keep interest rates ultra-low even if the economy starts to recover. That sent a clear signal that for years it will be cheap for consumers to borrow to buy homes and cars or for businesses to get loans to expand.
To reinforce the point, the Fed said it will buy $40 billion per month in mortgage bonds in addition to $45 billion in Treasury bonds through the end of the year, a process known as “quantitative easing.” After that, the Fed will reassess its actions, but it is likely to continue buying tens of billions of dollars of mortgage bonds unless the economy suddenly shows signs of a major rebound.
Four years after the financial crisis nearly sent the nation into a depression, the Fed’s actions underscored both the painful slowness of the recovery and the reality that the central bank is the only government entity willing to do anything about it. Fed leaders are worried that growth remains lackluster even though the central bank has injected more than a trillion dollars of new money into the economy, defying fears of critics that such continued intervention could spark inflation. The Fed said it expects to support the economy at least through mid-2015.
“This is sort of like: Whatever it takes. It strikes me as one of the most aggressive statements of policy by a modern central bank,” said John H. Makin, a scholar at the American Enterprise Institute. “I think their fear is if they’re not this aggressive, the economy will just stagnate and we’ll have long-run unemployment, and a loss of productivity and a long period of substandard growth.”
Stocks rise on news
The stock market was buoyed by the news. The Dow Jones industrial average rose 1.55 percent, to 13,539.86, while the Standard & Poor’s 500-stock index climbed 1.6 percent to close at 1459.99. The yield on the 10-year Treasury bond fell nearly 2 percent.
In afternoon remarks, Fed Chairman Ben S. Bernanke explained that the Fed no longer expected economic growth to pick up enough to materially reduce the 8.1 percent unemployment rate. He said the Fed will remain vigilant in ensuring that the central bank’s efforts to stimulate the economy don’t lead to rising prices, but said he saw little risk the economy would “overheat” and cause inflation.
Addressing the plight of 12.5 million jobless Americans, Bernanke used evocative language that made him sound more like an activist crusading to help the unemployed than the reserved professor he once was.
“The weak job market should concern every American. High unemployment imposes hardship on millions of people and it entails a tremendous waste of human skills and talents,” Bernanke said. “Five million Americans have been unemployed for more than six months, and millions more have left the labor force, many of them doubtless because they’ve given up on finding suitable work.”