Federal Reserve Moves to Boost the Ailing Economy

Sep 13, 2012 by JOE GANDELMAN, Editor-In-Chief

A new stimulus? In a major announcement, the Federal Reserve says it’s going to try and boost the tepid economic recovery. NBC News:

The Federal Reserve said Thursday it was taking new steps to boost the sluggish recovery through a program to purchase an additional $40 billion of mortgage debt per month for the foreseeable future.

It also said it would continue with its moves to drive down interest rates and spur investment until the labor situation improves.

“If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the Fed said in a statement.

As if to punctuate its concern about the unemployment rate, which policymakers said “remains elevated,” the Fed also asserted it would extend easier monetary policy by keeping interest rates at historic lows until mid-2015.

Investors cheered the Fed’s announcement. The Dow Jones Industrial Average rose over 90 points just after the Fed’s decision was released.

“They are definitely stepping up,” Anthony Valeri, fixed income strategist at LOP Financial in San Diego said of the central bank’s decision.

The moves come amid signs recently that hiring has slowed. The economy created a tepid 96,000 jobs in August, well below the 250,000 jobs economists think are needed to show robust growth. And the unemployment rate dropped to 8.1 percent from 8.3 percent mainly because so many Americans found it futile to continue to look for work.

On Thursday, the Labor Department reported that weekly jobless claims rose by a higher-than-expected 15,000 to 382,000. While the department attributed about 9,000 of those seasonally-adjusted new claims to Tropical Storm Isaac, the increase in claims showed a labor market heading in the wrong direction.

USA TODAY:

Moving to bolster the recovery, the Federal Reserve on Thursday agreed to buy $40 billion a month in mortgage-backed securities to cut borrowing costs for home buyers and other borrowers, and pledged to keep short-term rates near zero until at least mid-2015.

Markets reacted enthusiastically although an initial spike of nearly 1% in major indexes began to lose steam shortly after the Fed’s announcement.

It’s the first time since the Fed’s bond purchases began in 2008 that it has made an open-ended plan to buy government securities.

Economists say it represents a more powerful commitment to pump money into the economy until job growth picks upsignificantly.

Lower long-term rates cut borrowing costs for consumers and businesses, theoretically stimulating the purchase of homes, cars and factory equipment.

The Fed in January pledged to keep interest rates near zero until at least late 2014 but extended the commitment Thursday because of the weak economy.

The New York Times:

The Fed said that it would add $23 billion of mortgage bonds to its portfolio by the end of September and then announce its plans for October as part of a new process that aims to prioritize the Fed’s economic objectives.

The Fed also said, in a statement following a meeting of its policy-making committee, that it now expects to hold short-term interest rates near zero until at least mid-2015, extending the forecast it made in January by about half a year.

The statement said that the economy had continued to expand “at a moderate pace,” but that the Fed had concluded “growth might not be strong enough to generate sustained improvement in labor market conditions.”

That has been true for months, perhaps years, but implicit in the statement was the Fed’s conclusion that the situation was no longer acceptable. Eleven members of the committee voted for the action; Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, was the lone dissenter.

The Fed said that its actions “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

On Wall Street, traders welcomed the moves. The benchmark Standard & Poor’s 500-share index was up 0.9 percent, or 12.30 points, to 1,448.86 at midday, rising further as investors had more time to digest the news.

The Fed’s plan went further than many investors had expected by providing an open-ended commitment. But stocks have been rising in recent weeks, partly in anticipation of the Fed taking more measures to support the economy.

“There weren’t many more accommodative options the Fed could have gone with,” said Dan Greenhaus, the chief global strategist at BTIG, an institutional broker.

The Washington Post:

In the statement, the Fed added that without additional stimulus, “economic growth might not be strong enough to generate sustained improvement in labor market conditions.”

In totality, the measures will likely bring down interest rates — which are already at record lows — to support lending, borrowing and spending. They are the Fed’s most dramatic actions since 2010, and arguably the biggest package of actions since the Fed’s unprecedented intervention during the 2008 financial crisis.

By extending interest rate guidance and launching a new round of bond purchases, commonly known as “quantitative easing,” the Fed action is opening a new front in its efforts to stimulate the economy.

In 2008 and 2009, the Fed intervened in the market to end the financial crisis. In 2010, it worked its will to successfully fight deflation, or falling prices, a dangerous phenomenon that can wreak havoc on a nation’s economy and well-being.

Now, the Fed is poised to take measures to try to avoid the type of “lost decade” that Japan suffered after its financial crisis and that Europe seems increasingly likely to face now.

It is a measure of the Fed’s concern about the path of the economy that, more than three years after the growth restarted, it is taking dramatic, unprecedented actions. And it made clear Thursday it would continue to do so if necessary.

“Growth in employment has been slow, and the unemployment rate remains elevated,” the Federal Open Markets Committee said. “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

The Huffington Post:

The Fed just hit the economy with a double-barreled blast of stimulus.
The Federal Reserve on Thursday announced a new round of bond buying, with the new wrinkle of basically leaving the program open-ended. It also stretched out its promise to keep short-term interest rates near zero by a year, “at least through mid-2015.”

The moves will be controversial, particularly coming less than two months ahead of a heated presidential election. The Fed is already being accused of risking runaway inflation with its previous stimulus programs. And now it will likely come under fire for trying to boost the economy, which could benefit President Obama’s re-election chances.

But the Fed apparently felt it had no choice but to act in response to stubbornly high unemployment, sluggish economic growth and the risk of a fiscal-cliff recession at the turn of the year.

“The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the Federal Open Market Committee said in its statement.

As it was, some economists and market participants expressed disappointment that the Fed’s new buying program was not bigger.

“Overall, the Fed has done all the markets were asking for,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a note. “The problem is that we doubt it will be enough to get the economy on the right track. It’s only a matter of time before speculation begins as to when the Fed will raise its purchases.”

Donate to The Moderate Voice

Share This