The US Federal Reserve will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation. Policy makers, who said new purchases will be about $75 billion a month, “will adjust the program as needed to best foster maximum employment and price stability,” the Fed’s Open Market Committee said in a statement in Washington.
The central bank kept its pledge to keep interest rates low for an “extended period.”
Chairman Ben S Bernanke is trying to boost growth after near-zero interest rates and $1.7 trillion in securities purchases helped pull the economy out of recession without bringing down joblessness close to a 26-year high. He’s risking a strategy that may either fail or fuel inflation and asset bubbles, said Scott Pardee, a former New York Fed official who now teaches at Middlebury College in Vermont.
“Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the committee judges to be consistent, over the longer run, with its dual mandate,” the FOMC said. “Progress toward its objectives has been disappointingly slow.”
Including Treasury purchases from reinvesting proceeds of mortgage payments, the Fed will buy a total of $850 billion to $900 billion of securities through June, or about $110 billion per month, the New York Fed said in accompanying statement. The panel kept its benchmark interest rate at zero to 0.25 per cent, where it has been since December 2008.
Fifty-three of 56 economists surveyed by Bloomberg News last week predicted the central bank would announce asset purchases today, with 29 forecasting a pledge to buy $500 billion or more. Today’s action has been dubbed “QE2” by analysts and investors for the second round of a policy known as quantitative easing.
Central bankers in the world’s largest economy are struggling to bring down a jobless rate that has persisted at 9.5 per cent or higher for 14 months. U.S. payrolls have declined for four straight months as employees hired for the census were fired and state and local governments eliminated positions to balance budgets.
The Fed’s preferred gauge for consumer prices, which excludes food and energy, rose 1.2 per cent in September from a year earlier, the slowest pace since 2001. Fed policy makers have a long-run goal of 1.7 per cent to 2 per cent inflation they see as consistent with achieving legislative mandates for maximum employment and stable prices.
Bernanke, 56, a former Princeton University economist who studied the Great Depression, pressed forward with the move even after five of 18 policy makers went public with objections or doubts.
The one of the five who has a vote this year, Kansas City Fed President Thomas Hoenig, today cast his seventh straight dissent, the most at consecutive regular policy sessions since 1955.
US real gross domestic product, which is adjusted for inflation, grew at a 2 per cent annual pace in the third quarter, faster than the 1.7 per cent rate between April and June yet still below what central bank officials believe is needed to reduce unemployment.
