Fed ups ante in fight to curb unemployment

Ben Bernanke, chairman of the Federal Reserve, holds a press conference December 12, 2012, following a Federal Open Market Committee meeting in Washington. Chip Somodevilla/Getty Images

WASHINGTON The Federal Reserve will spend $45 billion a month to sustain an aggressive drive to keep long-term interest rates low. And it set a goal of keeping a key short-term rate near zero until unemployment drops below 6.5 percent.

The policies are intended to help an economy that the Fed says is growing only modestly with 7.7 percent unemployment in November.

The Fed said in a statement issued Wednesday that it will direct the money into long-term Treasurys to replace an expiring bond-purchase program. The new purchases will expand its investment portfolio, which has reached nearly $3 trillion.

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The central bank will continue buying $40 billion a month in mortgage bonds. All told, its monthly bond purchases will remain $85 billion. They are intended to reduce already record-low long-term rates to encourage borrowing and accelerate growth.

The Fed kept its target for its benchmark short-term interest rate at a record low near zero, where it has been for the last four years. The Fed said Wednesday that it would link any future rate change to lower unemployment, as long as inflation is expected to stay below 2.5 percent.

Before Wednesday, the Fed had said it planned would keep the rate low until at least mid-2015.

The Fed said it can pursue the aggressive stimulus programs because inflation remains below its target.

The statement was issued after the Fed's two-day policy meeting and approved on an 11-1 vote. Jeffrey Lacker, president of Federal Reserve Bank of Richmond, objected for the eighth time this year.

The Fed's final meeting of the year is being held against the backdrop of the looming "fiscal cliff," the sharp tax increases and spending cuts that will hit the economy in January if Congress and President Barack Obama are unable to reach an agreement this month to avert them.

Bernanke: "Fiscal cliff" already hurting economy

Bernanke said during a news conference in Washington on Wednesday that the U.S. economy is already being hurt by the "fiscal cliff." But he said the Fed believes the crisis will be resolved without significant long-term damage.

The steep tax increases and spending cuts can be avoided with a successful budget deal, said Bernanke. The Fed's latest forecasts for stronger economic growth next year and slightly lower unemployment assume that happens.

Still, Bernanke said the uncertainty surrounding the resolution is already affecting consumer and business confidence. And it has led businesses to cut back on investment.

"Clearly the fiscal cliff is having effects on the economy," Bernanke said.

Fears of the cliff have led some U.S. companies to delay expanding, investing and hiring. Manufacturing has slumped. Consumers have cut back on spending. Unemployment remains elevated. If higher taxes and government spending cuts were to last for much of 2013, most experts say the economy would sink into another recession.

Bernanke has said that the Fed's efforts will not be able to rescue the economy if the budget negotiations fail and the country does go over the fiscal cliff. According to Bernanke, the most helpful thing that Congress and the Obama administration can do is resolve the issue quickly.

"I'm hoping that Congress will do the right thing on the fiscal cliff," Bernanke said. "There is a problem with kicking the can down the road."

Bernanke repeated his belief that if the scheduled tax hikes and spending cuts do take effect in January, they will have a significantly adverse effect on the economy, regardless of what the Fed might do.

"We cannot offset the full impact of the fiscal cliff. It's just too big," Bernanke said.

Still, the Fed expects to keep purchasing bonds to support economic growth "until we see substantial improvement in the labor market," Bernanke said.

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