The US Federal Reserve took aim at slow growth and high joblessness on Thursday, announcing a new, open-ended US$40 billion per month bond-buying program as it slashed its growth forecast for this year.
The Fed said the new monetary easing effort would remain in place until it sees substantial improvement in the US jobs market, where 8.1 percent of Americans remain unemployed.
Doubling up on its message to banks, industry and consumers that holding their money unused would essentially cost them, the US central bank also pledged to keep its benchmark interest rate at ultra-low levels until at least the middle of 2015.
By then, it hopes, economic growth will have begun generating the jobs and spending levels necessary to be self-sustaining.
The news gave new life to US stocks on Thursday, with the S&P 500 closing up 1.63 percent, and the Dow 1.55 percent.
The news lifted the euro well past US$1.30, but Japanese authorities expressed concern that a flood of cheap dollars would further strengthen the yen, which hit a seven-month high against the greenback late on Thursday.
Asian markets surged yesterday, with Taipei climbing 2.1 percent to 7,738.05, Tokyo rising 1.83 percent to 9,159.39 and Seoul soaring 2.92 percent to 2,007.58.
Hong Kong rocketed 2.9 percent to 20,629.78, Shanghai added 1.09 percent to 2,123.85 and Sydney jumped 1.17 percent to 4,390.
In the face of weak growth and stagnant hiring, the Fed was to begin spending US$40 billion each month on mortgage-backed securities, its third “quantitative easing” (QE3) program in less than three years.
QE3 would take the Fed’s total monthly purchases, including ongoing programs, to US$85 billion a month, it said.
That “should increase the downward pressure on long-term interest rates more generally, but also on mortgage rates specifically, which should provide further support for the housing sector, encouraging home purchases and refinancing,” Fed Chairman Ben Bernanke said.
The effect should spill through to the broader economy, pushing up the prices of homes, stocks and other assets that the Fed hopes will make Americans feel more financially comfortable and begin spending.
If currently insecure and tight-fisted Americans are more willing to spend, Bernanke said: “That’s going to provide the demand most firms need to be able to hire or invest.”
The Federal Open Market Committee (FOMC), the Fed’s policy board, also said its monetary stimulus efforts will remain in place “for a considerable time after the economic recovery strengthens,” a promise it had not made before.
“If the outlook for the labor 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,” it said.
“We’re just trying to get the economy moving in the right direction to make sure that we don’t stagnate at high levels unemployment,” Bernanke told reporters.
The unemployment situation remained a “grave concern,” he said, adding: “The weak job market should concern every American.”
The FOMC cut its forecast for growth this year to 1.7 to 2.0 percent, from the previous 1.9 to 2.4 percent range, though it predicted a pickup to 2.5 to 3.0 percent next year.
The jobless rate would still be in the 6.7 to 7.3 percent at the end of 2014, while inflation would remain at or below the Fed’s 2 percent target through 2015.
Jim O’Sullivan of High Frequency Economics said that while the Fed’s move will not have much immediate effect, it will act on the economy “like a time-release capsule, the effects of which increasingly kick in over time.”
“The Fed news reinforces our view that 2013 growth is likely to be stronger than widely expected, with momentum building as the year progresses,” he said.
However, other analysts were more doubtful, pointing to external risks to the economy from Europe and China and the political stalemate over fiscal policy, which Bernanke conceded he has no leverage over.
“Our view is that these actions will do little to stimulate growth, but will raise inflation expectations,” John Ryding and Conrad DeQuadros of RDQ Economics said.
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