Fri, Dec 14, 2012 - Page 15 News List

Fed ties rates to jobs recovery

‘OPERATION TWIST’:The US central bank also replaced an expiring stimulus program with a commitment to purchase US$45 billion in longer-term Treasuries each month

Reuters, WASHINGTON

A drop in the unemployment rate to 7.7 percent last month from 7.9 percent in October was driven by workers exiting the labor force, and therefore did not come close to satisfying the condition the Fed has set for trimming its stimulus.

In response to the financial crisis and recession, the Fed slashed overnight rates to zero almost exactly four years ago and bought some US$2.4 trillion in mortgage and Treasury securities to keep long-term rates down.

Despite its unconventional and aggressive efforts, US economic growth remains tepid. Third-quarter GDP grew 2.7 percent from a year ago, but a Reuters poll published on Wednesday showed economists expect it to expand just a 1.2 percent pace in the current quarter.

Fed policymakers see GDP expanding between 2.3 percent and 3 percent next year. That is down from the 2.5 percent to 3 percent they forecast in September, but is still a bit more optimistic than most private forecasters.

Businesses have hunkered down, fearful of a tightening of fiscal policy as politicians in Washington wrangle over ways to avoid a US$600 billion mix of spending reductions and expiring tax cuts set to take hold at the start of next year.

Bernanke has warned that running over this “fiscal cliff” would lead to a new recession. He told reporters the Fed could ramp up its bond buying “a bit,” but emphasized that monetary policy has limits and could not fully offset the impact.

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