Federal Reserve announces QE3

Sept. 13, 2012 —

WASHINGTON (AP) — Alarmed by the chron­i­cally weak U.S. econ­omy, the Fed­eral Reserve launched an aggres­sive new effort Thurs­day to boost the stock mar­ket and make bor­row­ing cheaper for years to come.

As part of its bold and open-ended plan, the Fed said it would spend $40 bil­lion a month to buy mort­gage bonds to make home buy­ing more afford­able. That will be the third round of bond-buying in an effort to spur the econ­omy, and the Fed left open the pos­si­bil­ity of tak­ing other steps to encour­age bor­row­ing and finan­cial risk-taking.

And it made clear it won’t stop there and is ready to try other stim­u­la­tive mea­sures if hir­ing doesn’t pick up.

Stock prices rock­eted up in approval. But econ­o­mists said the Fed’s plans to buy mort­gage bonds for as long as it deems nec­es­sary and to keep inter­est rates at record lows until mid-2015 — six months longer than pre­vi­ously planned — might pro­vide lit­tle ben­e­fit to the economy.

Chair­man Ben Bernanke him­self cau­tioned that the Fed’s actions are no panacea for slow growth and high unem­ploy­ment, and said the econ­omy will prob­a­bly need help even after the recov­ery strengthens.

“The idea is to quicken the recov­ery,” Bernanke said at a news con­fer­ence after the Fed low­ered its out­look for growth this year.

Stock prices rose steadily after the Fed’s announce­ment at 12:30 p.m. East­ern time. The Dow Jones indus­trial aver­age closed up more than 200 points, com­ing within 625 points — or 4.6 per­cent — of its all-time high. Other stock aver­ages also surged.

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

Thursday’s announce­ment marked the Fed’s lat­est dra­matic inter­ven­tion since the finan­cial cri­sis erupted in 2008 and the reces­sion sent unem­ploy­ment into dou­ble dig­its. The Fed cut its bench­mark short-term rate to near zero and has kept it there for nearly four years. And it’s bought more than $2 tril­lion in Trea­surys and mort­gage bonds to try to drive down long-term rates.

Yet for all that, the U.S. econ­omy is still strug­gling. The unem­ploy­ment rate is 8.1 per­cent. And the Fed esti­mated Thurs­day that the rate will fall no lower than 7.6 per­cent in 2013.

The Fed’s lat­est actions came 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 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 also low­ered its out­look for eco­nomic growth this year, though it was more opti­mistic about the next two years. It said it expects growth to be no stronger than 2 per­cent this year, down from its fore­cast of 2.4 per­cent in June.

It said it expected the unem­ploy­ment rate to be no lower than 6.7 per­cent in 2014, with infla­tion remain­ing at or below 2 per­cent for three more years.

Bernanke made clear that higher stock prices are among the Fed’s goals in buy­ing bonds. Stock gains increase Amer­i­cans’ wealth, he noted, 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 Fed’s abil­ity to increase home buy­ing might be lim­ited even if its bond pur­chases help lower mort­gage rates. The aver­age rate on a 30-year fixed mort­gage is 3.55 per­cent. That’s barely above the record low of 3.49 per­cent set in July.

While the U.S. hous­ing mar­ket has improved, it has a long way to go to reach a full recov­ery. Some econ­o­mists fore­cast that sales of pre­vi­ously occu­pied homes will reach about 4.6 mil­lion this year. That’s well below the 5.5 mil­lion annual sales pace con­sid­ered healthy.

Bernanke sought to lower expec­ta­tions about how much the Fed’s inter­ven­tion might help the economy.

“We’re just try­ing to get the econ­omy mov­ing in the right direc­tion, to make sure that we don’t stag­nate at high lev­els of unem­ploy­ment,” he said. “All that being said, mon­e­tary pol­icy, as I’ve said many times, is not a panacea.”

The Fed’s state­ment was approved 11–1. The lone dis­senter was Rich­mond Fed Pres­i­dent Jef­frey Lacker, who wor­ried about ignit­ing inflation.

The Fed’s new bond 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.

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 expect it will take for the unem­ploy­ment rate to dip below 7 per­cent, toward a “nor­mal” rate of 6 per­cent or less.

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, which began in Novem­ber 2008 and ran until March 2010.

The Fed’s sec­ond bond-buying pro­gram totaled $600 bil­lion. It ran from Novem­ber 2010 through June 2011.

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

A spokes­woman for Mitt Romney’s Repub­li­can pres­i­den­tial cam­paign said the Fed’s lat­est efforts to boost the econ­omy are “fur­ther con­fir­ma­tion that Pres­i­dent Obama’s poli­cies have not worked.”

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 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.

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

Posted by Randa Wagner on Sep 13 2012. You can follow any responses to this entry through the RSS Feed. Both comments and pings are currently closed.