Fed boosts QE with $45B in monthly Treasury purchases

THE U.S. FEDERAL Reserve says it will continue to bolster the economy by stimulating growth unless the unemployment rate falls to 6.5 percent or the inflation rate reaches 2.5 percent.
Posted 12/12/12

WASHINGTON - The Federal Reserve said it will buy $45 billion a month of Treasury securities starting in January, expanding its asset-purchase program, and it linked the outlook for its main interest rate to unemployment and inflation.

“The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor-market conditions,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

The Fed said interest rates will stay low “at least as long” as the unemployment rate remains above 6.5 percent and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent. The committee “views these thresholds as consistent with its earlier date-based guidance.”

Chairman Ben S. Bernanke is using his unlimited authority to buy Treasuries in an unprecedented effort to stoke growth and reduce 7.7 percent unemployment. The Fed acted in its last regular meeting of the year as lawmakers and the Obama administration continue talks to avert more than $600 billion of automatic spending cuts and tax increases that threaten to throw the country into a recession.

Stocks and Treasury yields rose after the statement. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,431.93 at 12:35 p.m. in New York. The yield on the 10-year Treasury note was 1.69 percent, compared with 1.66 percent late yesterday.

MBS buying

The buying announced today will be in addition to $40 billion a month of mortgage-debt purchases. The FOMC said asset buying will continue “if the outlook for the labor market does not improve substantially.”

The latest move will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion in short-term Treasuries for an equal amount of long-term debt. That program kept the total size of the balance sheet unchanged, while the new purchases will expand the Fed’s holdings.

The Fed said that a highly accommodative monetary policy will be appropriate “for a considerable time after the asset purchase program ends and the economic recovery strengthens.” The Fed dropped its earlier pledge to hold interest rates near zero “at least through mid-2015.”

The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage-backed securities and said it will resume rolling over maturing Treasury securities.

Fed officials will release their projections for growth, inflation, unemployment and interest rates at 2 p.m. Washington time, and Bernanke plans to hold a press conference at 2:15 p.m.

Lacker dissents

Richmond Fed President Jeffrey Lacker dissented for the eighth consecutive meeting, saying he opposed the asset purchase program. Lacker opposed the FOMC’s June decision to extend Operation Twist through the end of the year along with additional asset purchases, saying more bond buying probably won’t quicken economic growth.

Lacker is the second Fed official under Bernanke to dissent at every meeting in a calendar year, following former Kansas City Fed President Thomas Hoenig who did the same in 2010.

Economists in a Bloomberg survey forecast that the Fed would announce purchases of $45 billion a month of Treasuries in addition to the existing $40 billion a month of mortgage debt.

Fed officials met as the economy showed few signs of reaching the pace of growth needed to put 12 million unemployed Americans back to work. While housing and auto sales have picked up, business spending and exports -- two drivers of the three- year expansion -- have cooled amid slowing global growth.

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