Sep 13, 2012 03:13 PM EDT
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Fed To Spend $40 Billion A month On Bond Purchases

By Donovan Jackson
Federal Reserve
(Photo : Reuters) The Federal Reserve launched another aggressive stimulus program on Thursday, saying it will buy $40 billion of mortgage-related debt per month until the outlook for jobs improves substantially as long as inflation remains contained.

In a last resort to help stimulate the economy and boost job growth the Federal Reserve has come up with a plan that will make things 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.

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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 U.S. and global economies remain more than three years after the Great Recession ended.

The Fed's 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.

Stock prices rose after the Fed's announcement. The Dow Jones industrial average was up nearly 150 points 90 minutes after the announcement at 12:30 p.m. Eastern time.

"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 Fed's new bond purchases 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 longer than previously assumed.

Skeptics caution that further bond buying might provide little benefit because rates are already near record lows. Critics also warn that more bond purchases raise the risk of higher inflation later.

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.

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