The Federal Reserve, frustrated by persistently high U.S. unemployment and the torpid recovery, launched an aggressive program to spur the economy through open-ended commitments to buy mortgage-backed securities and a promise to keep interest rates low for years.
The Fed's bond buying, also known as quantitative easing, is meant to drive down long-term interest rates and push investors into other assets, like stocks. It also is expected to weaken the value of the dollar, in part because the Fed is effectively printing more money to fund its purchases.
If the outlook for the labor market does not improve substantially, the Fed will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ other policy tools as appropriate until such improvement is achieved in a context of price stability.
The Fed has a dual mandate imposed by Congress to maximize employment and keep inflation stable. Officials believe inflation will remain around 2% in the years ahead, giving them leeway for more aggressive moves to stimulate the economy.
The central bank said it would continue through December a program known as Operation Twist: buying $45 billion a month in long-term Treasury bonds, and funding the purchases with proceeds from sales of short-term Treasurys. The Fed is funding the mortgage purchases with money it effectively creates itself when it credits the accounts of bond dealers with funds in exchange for the securities. The Fed's statement suggested that additional Treasury bond purchases through money printing could be launched next year along with mortgage-bond purchases if the economy doesn't pick up.
In addition to trying to drive down long-term interest rates, the Fed said it expected to keep short-term interest rates near zero through at least mid-2015. It had previously said it expected to keep rates that low through 2014. The Fed first pushed the federal funds rate—an overnight bank lending rate that is the central bank's primary lever in normal times—to zero in December 2008. Because it can't push that rate any lower, it has been experimenting with other tools for stimulating the financial system and economy.
The Fed is hoping its biggest impact will be in the mortgage market. Many homeowners have been unable to benefit from low rates because banks have been reluctant to write new loans. Millions have been unable to refinance their mortgages because they owe more than their homes are worth or they have tarnished credit, too much debt or too little income.
Critics point to the sluggish economy and 8.1% unemployment, and say the Fed's policies aren't working and that doing more would prove no better. (WSJ, 9/14/2012)