Stocks soar as QE programme marks biggest shift in policy since start of crisis with Bernanke going for growth
THE US central bank broke new ground last night, tying the creation of new money to improvements in the unemployment rate, rather than to monetary or financial conditions.
The Federal Reserve's Open Market Committee said it would "print" $40bn (€30bn) a month buying asset-backed mortgages, until the 8pc jobless rate begins to fall.
The new QE programme marks one of the most significant shifts by the Fed since the 2008-09 financial crisis.
The central bank's decision to tie its unconventional bond buying directly to economic conditions was an unprecedented step that marked a big escalation in its efforts to drive US unemployment lower.
It gave a big lift to US markets. US stocks immediately jumped after the announcement with S&P 500 rising to its highest level since 2007.
However, bond prices fell as some investors worried the aggressive easing of monetary policy might fuel inflation.
"The idea is to quicken the recovery," said Federal Reserve chairman Ben Bernanke. The Fed would not be "premature" in removing support for the economy.
"We're going to give it some time," he added.
"The employment situation remains a grave concern. While the economy appears to be on a path of moderate recovery, it isn't growing fast enough to make significant progress reducing the unemployment rate," he said.
In an additional move reflecting the Fed's deep concerns on the economy, policymakers said they were not likely to raise interest rates from current rock-bottom lows until at least mid-2015.
Previously, they had set such guidance at late 2014. It also lowered its outlook for growth this year but is more optimistic about the next two years. The Fed now expects growth to be no stronger than 2pc this year. That is down from its forecast of 2.4pc in June and in line with most private economists' predictions.
But it expects growth to accelerate next year to as much as 3pc. That is up from June's forecast of 2.8pc. For 2014, the bank projected growth between 3pc and 3.8pc.
"If the outlook for the labour market does not improve substantially, the committee will continue its purchases 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 rate-setting Federal Open Market Committee said in its statement.
The US economy is growing too slowly to significantly reduce high unemployment. The unemployment rate has topped 8pc every month since the recession officially ended more than three years ago.
In August, job growth slowed sharply. Employers added just 96,000 jobs, down from 141,000 in July and well below what is needed to bring relief to the more than 12 million people who are unemployed.
The unemployment rate did fall to 8.1pc from 8.3pc. But that was because many Americans stopped looking for work, so they were no longer counted as unemployed.
The decision comes in the face of widespread questions about the likely effectiveness of a further foray into unorthodox monetary policy, including from Republican presidential challenger Mitt Romney.
Senator John Cornyn, head of the senate Republican campaign committee, said the Fed appeared to be "trying to juice the economy" ahead of the November 6 presidential election to help Barack Obama. "It looks to be political," he said.
Mr Bernanke was an adviser in the administration of former president George W Bush, a Republican, and was nominated to the Fed by Mr Bush.
Lanhee Chen, policy director for the Romney campaign, used the Fed's announcement to argue it was time for a shift in policy. "We should be creating wealth, not printing dollars," Mr Chen said.
In its statement, the Fed said the fresh MBS purchases, which it will start on today, would come on top of its so-called Operation Twist programme, in which it is selling short-term bonds to buy longer-term treasury debt. (Additional reporting Reuters)