Fed Acts to Fix Jobs Market
Central Bank Unveils Sweeping Stimulus, Counts on Low Rates to Spur Hiring
By JON HILSENRATH and KRISTINA PETERSON
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Federal Reserve Chairman Ben Bernanke addresses three main concerns people have about the Federal Reserve's monetary policy; Fed purchases, low returns and inflation of the economy. Photo: Getty Images.
Federal Reserve Chairman Ben Bernanke addresses the media and explains why the Fed has decided to take action and issue a new round of Qualitative Easing. Photo:Getty Images.
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The Federal Reserve, frustrated by persistently high U.S. unemployment and the torpid recovery, launched an aggressive program to spur the economy through open-ended commitments to buy mortgage-backed securities and a promise to keep interest rates low for years.
In the most significant of its new moves, the Fed said Thursday it would buy $40 billion of mortgage-backed securities every month and would keep buying them until the job market improves, an unusually strong commitment by the central bank.
"We want to see more jobs," Fed Chairman Ben Bernanke said at a news conference Thursday, explaining the rationale for the Fed's actions. "We want to see lower unemployment. We want to see a stronger economy that can cause the improvement to be sustained."
The Fed's announcement sent investors piling into stocks, gold, the euro and other assets seen as likely to benefit from the extra liquidity. The Dow Jones Industrial Average soared 206.51 points, or 1.5%, to 13539.86, its highest level since December 2007. Prices rose for commodities, including oil, highlighting the risk that Fed policies could be undercut by pushing up some household costs.
Asian markets rose in early trading Friday, with Japan up 1.6%, South Korea up 2.4% and Australia up 1.1%.
Mr. Bernanke, mindful of the controversy that could erupt from acting so close to the Nov. 6 presidential election, devoted weeks to laying the groundwork for the new program by signaling its arrival and explaining why he wanted to launch it.
Democratic lawmakers welcomed the Fed action. Republicans mostly viewed the announcement as further evidence that President Barack Obama's economic policies weren't working.
The Fed's bond buying, also known as quantitative easing, is meant to drive down long-term interest rates and push investors into other assets, like stocks. It also is expected to weaken the value of the dollar, in part because the Fed is effectively printing more money to fund its purchases. Mr. Bernanke has argued those effects should spur more spending, investment and exports—though even Fed officials disagree on the magnitude of the benefits. By purchasing mortgage bonds, the Fed is trying to help the housing market, which is showing signs of stabilizing. Rates on the 30-year fixed-rate mortgage averaged 3.55% through Wednesday, down from 4.09% a year ago, according to Freddie Mac.
The $40 billion monthly price tag on the bond-buying program is relatively small compared with the $1.25 trillion mortgage-bond buying program the Fed launched in March 2009 and a $600 billion Treasury bond-buying program it launched in November 2010. But the new effort has the potential to become very large.
Associated Press; Getty Images
"If the outlook for the labor market does not improve substantially, the [Fed] will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ other policy tools as appropriate until such improvement is achieved in a context of price stability," the Fed said in its postmeeting statement.
That statement marked a tactical shift by more explicitly than ever tying future decisions to improvement in the job market. Academics have argued that the Fed can get better results if it expresses a stronger commitment to reaching economic goals. Mr. Bernanke, a former Princeton economics professor, moved in that direction. The Fed has a dual mandate imposed by Congress to maximize employment and keep inflation stable. Officials believe inflation will remain around 2% in the years ahead, giving them leeway for more aggressive moves to stimulate the economy.
The central bank is especially concerned about people like Jean O'Connell, of Appleton, Wis., who has been out of work since January 2011. Ms. O'Connell, who is 49 years old, was laid off from her job managing two gold- and diamond-buying centers after about seven years in the industry.
Ms. O'Connell said she worried her 20-month stretch of unemployment was making it harder to find a job. "I've had that question posed to me in several interviews: 'What have you been doing with your time?' It's a negative," she said. Mr. Bernanke noted Thursday, as he has before, that the longer people are out of the job market, the harder it can be to return.
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The central bank took other steps Thursday. It said it would continue through December a program known as Operation Twist: buying $45 billion a month in long-term Treasury bonds, and funding the purchases with proceeds from sales of short-term Treasurys.
The Fed is funding the mortgage purchases with money it effectively creates itself when it credits the accounts of bond dealers with funds in exchange for the securities. The Fed's statement suggested that additional Treasury bond purchases through money printing could be launched next year along with mortgage-bond purchases if the economy doesn't pick up.
In addition to trying to drive down long-term interest rates, the Fed said it expected to keep short-term interest rates near zero through at least mid-2015. It had previously said it expected to keep rates that low through 2014. It added, also for the first time, that it expected to keep rates near zero even after the recovery picks up steam—another signal of its newfound determination to speed up economic growth and reduce unemployment.
The Fed first pushed the federal funds rate—an overnight bank lending rate that is the central bank's primary lever in normal times—to zero in December 2008. Because it can't push that rate any lower, it has been experimenting with other tools for stimulating the financial system and economy.
Critics point to the sluggish economy and 8.1% unemployment, and say the Fed's policies aren't working and that doing more would prove no better. Economists surveyed by The Wall Street Journal before the Fed's decision said that a hypothetical $500 billion Fed bond-buying program would reduce the jobless rate by just 0.1 percentage point in a year's time. In a survey of 887 chief financial officers by Duke University and CFO magazine, 91% of respondents said they wouldn't change their investment plans even if interest rates dropped by a full percentage point.
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The Fed's assessment has found its programs have benefited the economy more than evaluations by many private economists surveyed by The Wall Street Journal. Mr. Bernanke acknowledged the critique and offered a detailed response. "I personally don't think [the bond-buying program] is a panacea," he said. "I personally don't think it is going to solve the problem" of weak growth and high unemployment. But he added the Fed could help to "nudge the economy in the right direction" with its program. "If we have tools that we think can provide some assistance and we're not meeting our mandate, then we have an obligation to do what we can."
In a victory for Mr. Bernanke, 10 other Fed officials voted for the new approach and just one, Richmond Fed President Jeffrey Lacker, voted against it. Mr. Bernanke had to contend with divisions within the Fed in crafting the initiative. The broad support he got for it could help to convince the public that the policies will be sustained, potentially even after Mr. Bernanke's second term as chairman is up in January 2014.
The Fed is hoping its biggest impact will be in the mortgage market. Many homeowners have been unable to benefit from low rates because banks have been reluctant to write new loans. Millions have been unable to refinance their mortgages because they owe more than their homes are worth or they have tarnished credit, too much debt or too little income.
But Mr. Bernanke said the program could have a big effect now as the housing market shows signs of reviving. He noted that home prices have ticked up in recent months and said he hopes the Fed's actions will boost them more. "To the extent that home prices begin to rise, consumers will feel wealthier; they'll feel more disposed to spend," he said.
—Nick Timiraos
and Jonathan Cheng
contributed to this article.
Write to Jon Hilsenrath at and Kristina Peterson at
A version of this article appeared September 14, 2012, on page A1 in the U.S. edition of The Wall Street Journal, with the headline: Fed Acts to Fix Jobs Market.