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U.S. Federal Reserve Board Chairman Ben Bernanke testifies in front of the U.S. Senate Budget Committee on ‘The U.S. Economic Outlook: Challenges for Monetary and Fiscal Policy’ on Capitol Hill in Washington, January 7, 2011.JIM BOURG/Reuters

The Federal Reserve said Thursday that it will deploy a third, multi-billion-dollar bond-buying program, and pledged to keep its benchmark interest rate near zero until at least mid-2015, extending its previous guidance by half a year.

In a statement, the Fed's policy committee said new monetary stimulus is necessary because the economy isn't growing fast enough to lower the unemployment rate. Both measures announced Thursday should put downward pressure on interest rates. The hope is that will be enough to coax businesses and households to spend and invest, generating demand that could lead to new jobs.

"The committee is concerned that without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions," the Federal Open Market Committee said after a two-day meeting in Washington.

In a separate release, the Fed cut its forecast for economic growth this year to between 1.7 per cent and 2 per cent, from 1.9 per cent to 2.4 per cent in June. The Fed raised its outlook for next year, saying growth could reach 3 per cent, compared with a maximum expectation of 2.8 per cent in last quarter's projections. Twelve of the 19 officials on the policy committee said they did not foresee raising interest rates before 2015. In June, seven predicted the first increase would come in 2014, while six said 2015.

The U.S. central bank said it would purchase mortgage-backed securities at a pace of about $40-billion (U.S.) per month, a strategy known as quantitative easing, or QE. The Fed has deployed QE twice since the financial crisis exploded in 2008, creating more than $2-trillion to purchased Treasuries and mortgage securities. The Fed also said it will be continuing Operation Twist, bringing the bank's total purchases of long-term securities to $85-billion a month until the end of the year.

Unlike its previous use of QE, the Fed on Thursday refrained from setting a limit on how much it would spend. The strategy is controversial because it could stoke inflation – in fact, Richmond Fed president Jeffrey Lacker voted against the latest move. However, the other 10 officials with votes on the committee sided with chairman Ben Bernanke, who last month defended QE, saying he believes the evidence shows the policy works.

"The committee will closely monitor incoming information on economic and financial developments in the coming months," the statement said. "If the outlook for the labour 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 the context of price stability."

The Fed's promise to keep interest rates "exceptionally low" for another three years, so long as inflation remains muted, represents exceptional clarity for an institution that held its first official press conference only a year ago. The Fed's original conditional commitment, in November 2011, was to keep the federal funds rate near zero until mid-2013; the pledge was extended to "at least" late 2014 in January. The goal is to bolster confidence by assuring consumers, executives and investors that they can make longer term investments without the threat of a sudden jump in borrowing costs.

Most of Wall Street was expecting new measures from the Fed after a government report on Friday showed U.S. payrolls increased by a disappointing 96,000 in August – a pace of hiring that Mr. Bernanke has indicated is insufficient to lower the unemployment rate.

After creating an average of 252,000 jobs a month in December through February, hiring has slowed to a monthly average of 97,000 as Europe slid into a recession and economic growth slowed markedly in China. The unemployment rate has been stuck between 8.3 per cent and 8.1 per cent since January, a rate that is more than 2 percentage points higher than the Fed's unofficial target.

The U.S. economy is growing at an annual rate of less the 2 per cent – decent during normal times, but unusually slow for a recovery from recession.

While the Fed failed to surprise analysts with its stimulus measures, many were caught off guard by the central bank's adoption of an open-ended approach to stimulus. Not only did the Fed commit to further measures if the economy fails to improve, but it said it would keep borrowing costs low once a stronger recovery takes hold.

"To support continued progress toward maximum employment and price stability, the committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens," the statement said.

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