Fed launches big stimulus, to buy bonds until jobs rebound

WASHINGTON, Thu Sep 13, 2012 – The Federal Reserve launched another aggressive stimulus program on Thursday, saying it will buy $40 billion of mortgage debt per month and continue to purchase assets until the outlook for jobs improves substantially.

In a significant shift in the direction of U.S. monetary policy, the Fed has tied its unconventional bond buying directly to economic conditions, a move that is likely to be controversial among central bank critics.

“If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the Fed said in a statement.

In an additional step that reflects just how concerned Fed officials have become about the health of the economy, policymakers said they would not likely raise rates from current rock-bottom lows until at least mid-2015. Previously, it had set such guidance at late 2014.

The decision comes in the face of widespread questions about the likely effectiveness of a further foray into unorthodox monetary policy, including from Republican presidential nominee Mitt Romney.

The latest purchases build on the $2.3 trillion in U.S. government and housing-related debt the Fed has already bought.

Bernanke says Fed has scope to provide more stimulus

WASHINGTON, Fri Aug 24, 2012 –The Federal Reserve has room to deliver additional monetary stimulus to boost the U.S. economy, Fed Chairman Ben Bernanke told a Congressional oversight panel in a letter.

“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” Bernanke wrote to the committee’s chairman, Representative Darrell Issa, in a letter obtained by Reuters on Friday.

Bernanke at the end of next week will give a closely watched speech at an annual symposium in Jackson Hole, Wyoming, which will be closely watched for clues into the prospect of further bond-buying from the Fed.

Asked if it was too soon to consider new monetary easing steps when the Fed’s Operation Twist program aimed at lowering long-term bond yields was still in effect, Bernanke said policymakers must invariably look beyond the immediate term.

“Because monetary policy actions operate with a lag, the stance of policy must necessarily be set in light of a forecast of future performance of the economy,” Bernanke said.

Fed officials sharply revised down their forecasts for U.S. economic growth in June, and another potential round of downward revisions could come at its September meeting.

U.S. gross domestic product expanded at an annual rate of 1.5 percent in the second quarter, a level seen too weak to lead to a sustained decline in unemployment, which rose to 8.3 percent in July.

Like they did last summer: Fed may ‘Twist’ again

WASHINGTON, Wed Jun 13, 2012 – It has become a familiar choreography for the Federal Reserve: Officials ease monetary policy, and the economy improves. Then conditions weaken, reviving debate about the need for further stimulus.

The central bank again finds itself at that difficult juncture heading into a meeting next week. As Europe’s banking crisis intensifies and the labor market sputters, the Fed appears increasingly likely to offer more monetary stimulus – despite political opposition, internal reticence and concerns about whether it will be effective.

Given an outlook that is weak but not recessionary, the Fed could opt for the relatively low-hanging fruit of extending “Operation Twist,” its effort to drive down long-term borrowing costs by selling short-term securities to buy longer-term ones.

Another relatively costless tool it could employ would be to push official guidance for when overnight interest rates are likely to rise, now set at late 2014, even further into the future.

Many believe that with government bond yields already near record lows as investors flock to safety, an extension of Twist, which is due to expire at the end of the month, or even outright bond purchases, might not do much good.

Atlanta Federal Reserve Bank President Dennis Lockhart, who has argued that the bar for further monetary support remains high, captured the sentiment while speaking to reporters this week.

“In some respects the market has been doing the job for the Federal Reserve of suppressing the longer-term rates,” he said.

But a growing chorus of economists, both within and outside the Fed, say the central bank cannot sit idly by with the U.S. unemployment rate still at an elevated 8.2 percent – and showing few hints of falling.

They argue for an extension of Twist if not a further expansion of the Fed’s balance sheet through bond purchases, a policy known as quantitative easing.

“It’s not about lowering the long-term rate it’s about getting people to believe in growth,” said Michael Dueker, a former St. Louis Fed economist now at Russell Investments.

Part of the idea is to get businesses to spend some of the cash they are sitting on by giving them confidence in the recovery. That in turn should bolster employment, and make Americans more comfortable about their finances.

“It’s a signal from the Fed that they’re not going to let the economy stagnate,” said Dueker.

The Fed, which meets on June 19-20, has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in securities in two separate bouts of quantitative easing, or QE.

It then launched a $400 billion Operation Twist. The Bank for International Settlements estimated in March the policy would have a similar effect on 10-year Treasury yields as the second round of QE, potentially lowering them by about 0.85 percentage point.

Rates on the benchmark 10-year Treasury slumped to a record low of 1.442 percent on June 1, after the weak May payrolls data. Mortgage rates are also at their lowest ever, with a 30-year fixed mortgage available for less than 4 percent.

Glum Fed considered even bolder action in August

WASHINGTON ― The Federal Reserve considered a range of actions to help a struggling economy at its August meeting, including the unprecedented step of tying the interest rate policy outlook to a specific unemployment level.

Before settling on a promise to keep rates near zero until 2013, a decision that prompted three dissents, Fed officials noted the economic outlook had worsened significantly, arguing that the weakness seen during the first half of the year could no longer be dismissed as solely temporary.

“Participants noted a deterioration in labor market conditions, slower household spending, a drop in consumer and business confidence and continued weakness in the housing sector,” according to minutes from the central bank’s Aug. 9 meeting released Tuesday.

Against that backdrop, a few Fed members wanted to take even bolder action but, the minutes said, “were willing to accept the stronger forward guidance as a step in the direction of additional accommodation.”

The economy sputtered in the first six months of 2011, with gross domestic product expanding at less than a 1 percent annual pace. The jobless rate, meanwhile, remains stuck above 9 percent.

At its meeting, the Fed discussed a range of tools for additional monetary easing, including engaging in further asset purchases or shifting the composition of bonds on the central bank’s portfolio toward longer-dated maturities.

Purchases of longer-dated securities could further depress long-term borrowing costs, though some Fed officials expressed doubt that any of these steps would offer much support to growth.

Still, given the prospect of a protracted snail-paced recovery and tighter fiscal policy, Fed officials scrambled for unorthodox ways they could bolster the recovery.

“In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate,” the minutes said.