Fri, Jan 27, 2012 - Page 1 News List

Fed lays groundwork for bond buying

QE3 in APRIL?US economic policymakers set a long-term goal of 2 percent inflation, and forecast that price increases would fall short of that target both this year and next


US Federal Reserve Chairman Ben Bernanke laid the groundwork for a third round of large-scale asset purchases should unemployment remain higher than the Fed would like, while inflation fell below a newly established target.

The Federal Open Market Committee “recognizes the hardships imposed by high and persistent unemployment in an underperforming economy and it is prepared to provide further monetary accommodation,” Bernanke said on Wednesday at a press conference in Washington.

Stocks and Treasuries rallied after policymakers said the benchmark interest rate would stay low until at least late 2014, pushing back a previous date of the middle of next year. Fed officials also lowered their projections for economic expansion and inflation for this year and next.

“It was an unambiguous, aggressive statement,” said Julia Coronado, chief economist for North America at BNP Paribas in New York.

“My expectation is that we are going to get ‘Quantitative Easing Three’ in April,” she said, referring to a third round of bond buying.

The US central bank’s “two main tools” to boost growth are asset purchases and communications, and bond buying is “an option that is certainly on the table,” Bernanke said.

“The unemployment level is elevated and the inflation outlook is subdued,” he added.

Policymakers set a long-term goal of 2 percent inflation, and forecast that price increases would fall short of that target this year and next. The personal consumption expenditures price index climbed 2.5 percent for the 12 months ending in November.

Setting an inflation target was a longtime aim for Bernanke, a former Princeton University professor who mentioned it in his nomination hearing in 2005 and who has pushed the Fed to be more transparent in its dealings with the public.

“If there’s a need to let inflation [return] a little more slowly to target in order to get a better result on employment, then that’s something that we would be willing to do,” Bernanke said.

Inflation will range from 1.4 percent to 1.8 percent this year, and from 1.4 percent to 2 percent next year, Fed officials forecast. In November, they projected inflation of 1.4 percent to 2 percent this year, and 1.5 percent to 2 percent next year.

The Fed pushed back its horizon for the first interest rate increase since June 2006 even as recent reports on manufacturing, housing and employment indicated that the economy was picking up speed as the year began.

Employers added 200,000 jobs last month, twice the previous month’s pace, and the unemployment rate dropped to 8.5 percent from 8.7 percent in November. Household wealth has also gotten a boost from rising stock prices, with the Standard & Poor’s 500 Index climbing 5.4 percent this year through Wednesday.

“There has certainly been some encouraging news recently,” Bernanke said. “[Still,] we continue to see headwinds from Europe, coming from the slowing global economy and some other factors as well.”

Fed officials lowered their forecast for growth this year to between 2.2 percent and 2.7 percent, down from a projection of 2.5 percent to 2.9 percent in November. They predicted the economy next year would expand 2.8 percent to 3.2 percent, compared with a previous forecast of 3 percent to 3.5 percent.

Bernanke has “a very dovish attitude,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta, who is now chief monetary economist for Sarasota, Florida-based Cumberland Advisors. “They downplayed the extent to which the economy seemed to be doing a little better and said the employment situation is a major concern.”

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