Fed bets big in new push to rescue economy

Thu Sep 13, 2012 2:02pm EDT
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By Pedro da Costa and Alister Bull

WASHINGTON (Reuters) - The Federal Reserve launched another aggressive stimulus program on Thursday, saying it will buy $40 billion of mortgage-backed debt per month until the outlook for jobs improves substantially as long as inflation remains contained.

In an unprecedented step, the Fed's policymaking panel escalated its effort to drive U.S. unemployment lower by tying its unconventional bond buying directly to economic conditions, a move that immediately sparked controversy among its 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 move that reflects just how concerned Fed officials are about the economy, officials said they were not likely to raise interest rates from current rock-bottom lows until at least mid-2015. Previously, it had set such guidance at late 2014.

"To support continued progress toward maximum employment and price stability, the committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens," the central bank said.

U.S. stocks added to gains on the Fed's move, the dollar fell broadly, oil prices rose and gold hit a six-month high. However, bond prices dropped as some investors worried the aggressive easing of monetary policy might fuel inflation.

"They are definitely stepping up," said William Larkin, a portfolio manager at Cabot Money Management in Salem, Massachusetts. "It creates an inflation outlook concern because if you are doing it for this extreme for this length of time, my biggest question is what is going to happen to inflation in two years?"

PUSHING ON A STRING?   Continued...

The Federal Reserve building is seen in Washington June 19, 2012. REUTERS/Yuri Gripas