The US Federal Reserve sent a clear signal Wednesday that it will keep interest rates low to boost the economy even after significant improvement of the job market was released.
In light of the current unemployment rate of 7.7%the Fed says it plans to keep its key short-term rate near zero until the rate reaches 6.5% or less, and as long as expected inflation is tame.
The Fed has said previously that it plans to keep the rate low until at least mid-2015. Now the Fed is being clearer that its actions will be directly linked to specific economic indicators.
“This approach is superior” to setting a timetable for a possible rate increase, Chairman Ben Bernanke said at a news conference. “It is more transparent and will allow the markets to respond quickly and promptly to changes” in the Fed’s economic outlook.
Bernanke made clear that even after unemployment falls below 6.5 percent, the Fed might decide that it needs to keep stimulating the economy. Other economic factors will also shape its policy decisions, he said.
The Fed will spend USD $45 billion a month on long-term Treasury purchases to replace a bond-purchase program of the same size. At the same time the Fed will continue to buy USD $40 billion a month in mortgage bonds.
“The Fed has become more explicit and more transparent,” said Steven Wood, chief economist at Insight Economics told AP reporters. “This should provide the markets with much more clarity around monetary policy action in the upcoming year.”
The policies are intended to help an economy that the Fed says is growing only modestly.
Stocks and bond yields rose after the Fed’s statement was released. The Dow Jones industrial average was little changed just before the Fed announcement and closed down 3 points at 13,245.
All things considered Bernanke has still 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.
Index Performance: (30-Day) Between November 12, 2012 and December 12, 2012, Dow Jones industrial average (DJI) has increased 430.29 points (+3.35%) from 12,815.16 to 13,245.45.