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Federal Reserve policymakers announced a bold move today to boost the sluggish economy. The Fed said it would buy $40 billion of mortgage-backed securities a month to help push mortgage interest rates down. It also said it expects to keep short-term rates low until the middle of 2015. NPR's John Ydstie reports.
JOHN YDSTIE, BYLINE: Federal Reserve Chairman Ben Bernanke had made clear the Fed would likely need to do more to boost the economic recovery and bring down an unemployment rate stuck above 8 percent. The financial markets expected that would happen at the end of the Fed's two-day meeting, and they weren't disappointed.
In a statement released at half past noon, policymakers said they were embarking on a third round of bond buying known as quantitative easing. But the so-called QE3 will be different from the first two rounds. It will focus on purchases of mortgage-backed securities. Fed Chairman Bernanke explained the rationale at his news conference.
BEN BERNANKE: Our mortgage-backed securities purchases ought to drive down mortgage rates and put down - downward pressure on mortgage rates and create more demand for homes and more refinancing.
YDSTIE: There was another new wrinkle in the Fed statement today. The policymaking committee said it would continue its stimulative program for a considerable time after economic recovery strengthens.
BERNANKE: We're not going to be premature in removing policy accommodation. Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we're not going to rush to begin to tighten policy. We're going to give it some time to make sure the recovery is well established.
YDSTIE: In the past, the Fed has generally been quick to raise rates as economic activity has picked up to avoid allowing inflation to take hold. The Fed's commitment to keep rates lower longer made some in the financial markets a bit nervous about inflation. As a result, long-term rates rose after the announcement.
While financial market participants had widely expected the Fed to begin another round of bond buying, many economists have suggested it will not have much effect. Peter Fisher, a senior managing director at the financial firm BlackRock, says buying mortgage-backed securities is likely to have little effect on the overall economy.
PETER FISHER: The housing is still just 2 percent of GDP now. So it's so shrunken as a share of GDP, I'm not sure that's really going to change the employment situation very quickly.
YDSTIE: Bernanke responded to the doubters like Fisher this way.
BERNANKE: Our assessment and that of the research literature is that the policies we've undertaken have had real benefits for the economy, that they have provided some support, that they have eased financial conditions and helped reduce unemployment. All that being said, our monetary policy, as I've said many times, is not a panacea. It's not, by itself, able to solve these problems.
YDSTIE: Bernanke again called on Congress and the White House to help boost the economy by dealing with the so-called fiscal cliff. There were other critics of the Fed's action today. They accused the Fed of getting involved in politics by making such a big move just before a presidential election. Republican Senator John Cornyn of Texas said the Fed was trying to juice the economy ahead of the election to help President Obama. Bernanke said the Fed's decisions were not political.
BERNANKE: We have tried very, very hard - and I think we've been successful at the Federal Reserve - to be nonpartisan and apolitical. We make our decisions based entirely on the state of the economy and the needs of the economy for a policy accommodation. So we just don't take those factors into account, and we think that's the best way to maintain our independence and maintain the trust of the public.
YDSTIE: The Fed also released a new economic forecast today. It lowered its projection for economic growth for this year to just below 2 percent. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.