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December 12, 2012

US Central Bank Adopts New Stimulus to Boost Economy

by VOA News

The U.S. central bank says it is embarking on a new plan to buy government securities, its latest effort to keep borrowing rates low and to boost the sluggish American economy.

Federal Reserve policy makers in Washington agreed Wednesday to buy $45 billion worth of government bonds each month, beginning in January, in addition to the $40 billion worth of real estate-related securities the central bank already is buying monthly.

Taken together, Federal Reserve Chairman Ben Bernanke said the asset purchases should exert "downward pressure" on long-term interest rates to encourage U.S. business growth and expand its labor market.

The Federal Reserve also said it would keep its benchmark lending rate at between zero and a quarter of a percentage point, and maintain it at that historically low level as long as the nation's jobless rate remains above 6.5 percent and consumer price inflation is limited. The U.S. unemployment rate has been falling, but still was pegged at 7.7 percent in November.

Bernanke said it could be mid-2015 before the U.S. jobless rate goes down to 6.5 percent. He said high unemployment has been devastating for the country.

"The conditions now prevailing in the job market represent an enormous waste of human and economic potential," he said. "The return to broad-based prosperity will require sustained improvement in the job market, which in turn requires stronger economic growth."

In a statement after a two-day meeting, the Fed said it felt compelled to start the new bond-buying program because "without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions."

Keeping interest rates low

One analyst, Greg McBride with Bankrate.com, said he thinks the Fed's action could boost the American economy.

"I expect it will push long-term interest rates lower, which means lower fixed mortgage rates, lower corporate borrowing rates," McBride said. "I think it will further fuel a stock market rally, depending on what happens with the fiscal cliff.”

The central bank has pumped hundreds of billions of dollars into the U.S. economy over the last two years through the purchase of government bonds and real estate-related securities. But the world's largest economy only advanced at a modest pace, 2.7 percent in the July-to-September period, as it recovers from the steep economic downturn in 2008 and 2009.

​​The Fed predicted the U.S. economy could advance by as much as 3 percent next year and 3.5 percent in 2014.

The impending "fiscal cliff"

The central bank adopted the new stimulus as President Barack Obama and Congress are engaged in contentious negotiations on how to resolve key government tax and spending issues by the end of the year. Bernanke said it is critical that they reach a compromise.

Washington is calling it a "fiscal cliff," about $500 billion worth of mandated spending cuts in key government programs and the expiration of tax breaks for most American workers that are set to take effect January 1, unless an alternative financial plan is adopted.

Independent analysts said that if the White House and Mr. Obama's Republican opponents in Congress do not reach agreement, the spending cuts and tax increases could push the American economy into its second recession in three years, possibly adversely affecting the world economy as well.