Fed takes additional steps to jolt growth and hiring

McClatchy NewspapersSeptember 13, 2012 

— Offering the third incarnation of its unconventional efforts to spark economic activity, the Federal Reserve on Thursday announced a new round of controversial bond buying, sending stock prices soaring and triggering angry criticism from some lawmakers in Congress.

The Fed said it would expand the ongoing programs to purchase mortgage bonds, a process called quantitative easing, by $40 billion a month through year’s end and perhaps beyond. It also will continue another program to extend the average maturity of the securities it holds by swapping out shorter-term treasury bonds for longer-term bonds.

Both moves seek to help consumers and businesses by further pushing down already low lending rates, but together they would add $85 billion to the Fed’s balance sheet every month for the remainder of the year.

Although many economists have warned of diminishing returns on additional bond buying, the Fed hopes its action will make it cheaper for Americans to borrow to buy cars, boats, condos or homes. Another expected benefit is that earlier bond buying helped bolster stock prices, an unheralded benefit for the millions of Americans who have 401(k) retirement plans.

The idea behind the aggressive purchase of Treasury and mortgage bonds is to force investors out of safe bets and into risk-taking that supports economic activity. This happens because the Fed’s purchases drive the return on investment in bonds so low that investors seek better profits from stocks, corporate bonds, commodities and other investments.

The Fed’s move amounted to a shift in emphasis, since prior Fed actions were said to be in support of the economy. Chairman Ben Bernanke described Thursday’s action as an effort to further lower the unemployment rate, which has stubbornly remained at 8.1 percent, where it is now, or higher since February 2009. With large numbers of Americans stuck without jobs for months and even years at a time, the unemployment rate threatens to do permanent economic damage, he warned.

“The idea is to quicken the recovery,” Bernanke said in a news conference after a two-day meeting by the rate-setting Federal Open Market Committee.

Cautioning that the action isn’t a panacea, Bernanke said he sought “to help nudge the economy in the right direction.”

Financial markets had hoped for some additional support from the Fed but they got more than even they’d expected. Stocks soared in response, with the Dow Jones industrial average closing up 206.51 points to 13,539.86. The S&P 500 rose by 23.43 points to 1459.99, and the Nasdaq finished up 41.52 points to 3,155.83.

In another small step to boost the economy, the Fed changed the language in the statement that accompanies each of its meetings.

It told investors that it now expected its exceptionally low benchmark federal funds rate – which influences the prime rate banks charge consumers and businesses – to remain at a range between zero and a quarter of a percentage point through the end of 2015.

Previous statements had anticipated that the low rate – which hit its record low in December 2008 – would stay there until the end of 2014. This shows financial markets that the Fed is willing to take extraordinary measures to help the U.S. economy recover its footing.

The Fed’s action Thursday comes amid a heated political campaign, and while Bernanke was first appointed by Republican President George W. Bush, many Republicans don’t want the autonomous Fed to take any additional steps, since its balance sheet has swelled to nearly $3 trillion. GOP presidential nominee Mitt Romney has said he won’t reappoint the chairman when Bernanke’s term expires in 2014. Romney’s running mate, Rep. Paul Ryan, R-Wis., publicly called on Bernanke last week to halt further bond purchases.

Republican reaction Thursday was swift and angry.

“I’m disappointed in the Federal Reserve’s actions today and truly believe Chairman Bernanke is beginning to do serious damage to the Fed as an institution,” Sen. Bob Corker, R-Tenn., said in a statement. “Open-ended purchases of mortgage-backed securities (mortgage bonds) will politicize the Fed and add substantially to its balance sheet risks, but it will not help our economy’s long-term growth prospects.”

In a statement, Republican Rep. Jeb Hensarling of Texas, the vice chairman of the House Financial Services Committee, said the Fed’s action underscored the Obama administration’s failed economic policies.

“It is regrettable that the president’s failed policies have compelled the Fed to take further unprecedented action to expand the monetary base,” he said.

Democrats responded in kind.

“The Fed is fulfilling its obligation to take action to address unemployment. Now congressional Republicans need to fulfill theirs,” Sen. Charles Schumer, D-N.Y., a member of the Senate Banking Committee, said in a statement.

Bernanke shrugged off suggestions that his action benefits President Barack Obama, saying, “We just don’t take those factors into account.”

But he felt compelled to stress that the Fed’s three quantitative easing moves aren’t akin to almost $3 trillion in new spending, a frequent Republican allegation, noting that bonds eventually will be sold back into financial markets or will roll off the Fed’s balance sheet as they reach maturity. Politicians, such as Corker, who sway public opinion increasingly are questioning the Fed’s own credibility.

“Could it potentially damage the institution long term? Yeah, definitely, no doubt about it,” said Dean Croushore, a former vice president of the Federal Reserve Bank of Philadelphia who’s a professor at the University of Richmond in Virginia. “You can see it as more justified in the middle of the financial crisis. . . . Are things bad enough to compromise their independence now? I think it’s a legitimate question to raise.”

The jobless rate has come down 2 full percentage points from its financial-crisis high of 10.1 percent, but it remains elevated. The economy has grown in fits and starts since the recession ended in June 2009, held back in part by a global slowdown, a debt crisis in Europe and volatile energy prices that are sapping U.S. consumers.

The Fed’s new bond buy-in was supported by all members of the rate-setting Federal Open Market Committee except Jeffery Lacker, the president of the Federal Reserve Bank of Richmond. He’s opposed for months any additional asset purchases or inclusion of language promising exceptionally low levels for the federal fund rate for an extended period.

The Fed also released its updated economic forecast Thursday, changing it only slightly from its June projections. The Fed now expects economic growth this year to be 1.7 percent to 2 percent, down from 1.9 percent to 2.4 percent it forecast in June. Its view on the unemployment rate remained unchanged, at 8 percent to 8.2 percent.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall

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