Caroline Salas Gage and Craig Torres Washington and New York
Chairman Ben Bernanke moved the US Federal Reserve further into uncharted policy territory in combating joblessness on Wednesday by tying the bank’s interest-rate outlook to unemployment and inflation, while committing to an even faster expansion of the bank’s balance sheet.
The actions, on the eve of the Fed’s centenary year, underscore Bernanke’s hallmark commitment to experimentation and forceful action, derived in part from his research showing that too little monetary stimulus produced large economic costs for the US in the 1930s and for Japan in the 1990s.
He called the current state of the labour market, with unemployment at 7.7 percent, “an enormous waste of human and economic potential” and said the benefits of more bond buying outweighed the potential risks.
“Bernanke is pulling out all the stops to kick this economy back into a higher gear,” said Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. “They are buying everything in sight – treasuries, mortgage-backed securities – and will keep rates low until everyone who wants a job has one.”
Bonds fell on Wednesday on the prospect of higher inflation after policymakers boosted their main stimulus tool by adding $45 billion (R390bn) of monthly treasury purchases to an existing programme to buy $40bn in mortgage debt a month.
That decision puts the Fed’s $2.86 trillion balance sheet on track to reach almost $4 trillion by the end of 2013.
The yield on the 10-year note was little changed yesterday, trading at 1.69 percent at 9.13am in London.
US stocks erased gains late on Wednesday, as optimism about the additional asset purchases faded and investors focused on the budget deadlock in Washington.
Central bankers linked their rate outlook to economic thresholds for the first time, saying rates would stay low “at least as long” as unemployment remained above 6.5 percent and if the Fed projected inflation of no more than 2.5 percent one or two years in the future.
Fed officials do not see joblessness falling near that goal until 2015.
The adoption of thresholds was urged in September 2011 by Charles Evans, the Chicago Fed president, who said the central bank should “add very significant amounts of policy accommodation” to bring down unemployment, even at the risk of an increase in inflation.
A year later, the idea was backed by president Narayana Kocherlakota of Minneapolis, who had earlier criticised the Fed’s easing policies. Fed vice-chairman Janet Yellen and the Boston Fed’s Eric Rosengren backed the concept last month.
“The Fed is all in,” said Diane Swonk, the chief economist for Mesirow Financial.
“They are absolutely committed to averting the mistakes of the Japanese and of the Great Depression. They will not stop too soon. [Bernanke] is willing to take the risk of unintended consequences.”