Federal stimulus to continue until unemployment drops to 6.5 percent

Share with others:

Print Email Read Later

WASHINGTON -- Offering greater clarity to financial markets and politicians, the Federal Reserve on Wednesday took the unprecedented step of saying it would continue its controversial bond-buying and other steps to stimulate the economy until the unemployment rate falls to 6.5 percent or below and stays there.

The Fed's benchmark federal funds rate, the primary way it influences lending rates across the economy, has been near zero since December 2008. Unable to cut rates any further, the Fed has taken a number of unconventional steps to try to energize a subpar recovery.

Critics, especially Republicans in Congress, contended that the steps may eventually spark inflation that is hard to tame and complained about their open-ended nature.

Fed chairman Ben Bernanke sought to quell that criticism by offering a threshold -- the 6.5 percent unemployment rate, which he cautioned was nothing more than a meaningful idea of when the Fed might start pulling back on its accommodative policies and raise interest rates.

"It is not a target. What it is is a guidepost of when to begin reduction of accommodation," Mr. Bernanke said in a lengthy news conference, which included calls on Congress to avoid the fiscal cliff and projections that show the Fed slightly downgrading U.S. growth prospects for next year.

With its benchmark rate stuck near zero, the Fed has tried to approximate the effects of negative interest rates with a program economists call quantitative easing. This involves buying long-term bonds, now accounting for more than $2.8 trillion on the Fed's balance sheet. The intent is to push down borrowing costs for purchases of big-ticket items such as homes, cars and other types of loans. These measures are also designed to force investors out of safe harbors and into risk-taking that generates economic activity.

In September, the Fed said it would do even more buying, and on Wednesday, it followed through with an announcement that next month it would begin buying $45 billion in long-term Treasury bonds and another $40 billion in mortgage bonds.

Critics of quantitative easing, which Mr. Bernanke suggested Wednesday was an experiment of sorts, fear that it will be difficult to undo the effects of so much stimulus, and that the result will be persistent inflation.

Mr. Bernanke told reporters that there are no signs of inflation now, or even expectations of inflation. By offering a guidepost keyed to unemployment rather than the calendar, the Fed was replacing the current practice of saying how long it expects to keep providing life support to the economy. Fed guidance had been to provide support through the end of 2014, and more recently 2015.

As it stands, the Fed's best estimate for unemployment in 2013 is that the U.S. jobless rate will end next year somewhere between 7.4 percent and 7.7 percent, where it stands today. Asked about that stubbornly high rate, Mr. Bernanke acknowledged that it has fallen of late in part because of job creation, but also in part because of older workers exiting the labor force -- some of whom would have done so regardless of economic conditions.

"There's not any question about that," he said. "But it's also the case that a number of indicators of the labor market remain quite weak, ranging from the number of long-term unemployed to the number of people who have part-time work who would like ... full-time work; wage growth is obviously very weak; and I could go on. It may be that the labor market is even a bit weaker than the current unemployment rate suggests, but I think ... there has been improvement since the trough several years ago."

Having coined the term "fiscal cliff," Mr. Bernanke called his neologism a sensible and accurate reflection of risks to the U.S. economy if scheduled tax increases and deep spending cuts are allowed to take force early next year. If Congress allows fiscal policy to contract and drag against growth -- because government spending is always a factor in the growth rate -- "the economy, I think, will go off a cliff" and into recession, the Fed chairman said.

Financial markets are acting as if a deal will be reached in a bitterly divided Congress, Mr. Bernanke said, cautioning that lawmakers should avoid a repeat of last year's debt-ceiling debacle, which drove down stock prices and erased wealth. "I certainly hope that markets won't have to tank" to force a deal, he said.

The announcement may be an economic vaccine, with fiscal-cliff negotiations showing little outward signs of progress, suggested Paul Edelstein, forecaster IHS Global Insight's director of financial economics. "With the U.S. economy approaching the fiscal cliff, this move was likely done in an attempt to provide a cushion, but it is unlikely that we could escape a recession if we go over the cliff," he said in a research note.

Wednesday also marked the Fed's final updating of the year of its economic forecast. Fed board members and Fed bank presidents slightly downgraded their growth forecast for 2013 to a range between 2.3 percent and 3 percent. In their September forecast, the 19 participants collectively saw growth next year between 2.5 percent and 3 percent.

In perhaps the oddest question in a wide-ranging and lengthy news conference, the professorial Mr. Bernanke was asked how he had lost the Southern accent he grew up with in the farm town of Dillon, S.C. "I like to think I am bilingual," the Fed chief quipped to loud laughter.


Talks to avert a fiscal meltdown have stalled once again. Page A-X



Create a free PG account.
Already have an account?