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U.S. Federal Reserve to restart ‘money pump’ with further ‘quantitative easing’

U.S. Federal Reserve to restart ‘money pump’ with further ‘quantitative easing’

The US central bank has announced it will resume its policy of pumping more money into the economy via so-called quantitative easing.

The Federal Reserve said it will buy “additional agency mortgage-backed securities at a pace of $40bn (£25bn) per month”.

The central bank also said it could increase the size of its purchases if the economy does not improve.

The economy is a pivotal issue in this year’s US presidential electionasset purchases

Interest rates in the US have been close to zero for several years now, and the Fed againt kept them at below 0.25%.

‘Matter of time’

Speaking later, Fed chairman Ben Bernanke also lowered the Fed’s growth forecast for the US economy to 2% this year, down from the 2.4% it predicted in June. But it expects growth to rebound in 2013 to as much as 3%.

“The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions,” said the Fed.

US stocks, which had been little changed, gained after the announcement. The benchmark Dow Jones average was 0.7% higher.

The US central bank has tried to support the economy by quantitative easing – buying $2.3tn (£1.4tn) in bonds in two rounds.

For some analysts, the latest measures – dubbed “QE3” – were less than expected.

“We doubt it will be enough to get the economy on the right track,” said Paul Ashworth, an economist at Capital Economics. “It’s only a matter of time before speculation begins as to when the Fed will raise its purchases from $40bn a month.”

The Fed calls such measures “asset purchases”, where the central bank buys bonds to keep the long-term cost of borrowing down. The last round of asset purchases ended last year.

Mortgage-backed securities are debt backed by loans made to homeowners.

The unemployment rate in the US has been above 8% since January 2009, but the current 8.1% is down from the recent high of 10% in October 2009.

“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 Fed said.

The Fed also confirmed that its $267bn (£170bn) programme to reduce long-term borrowing costs for firms and households would continue for the rest of the year.

In a move dubbed “Operation Twist”, the central bank buys longer-term bonds from retail lenders and swaps them for shorter-term bonds.
Source: BBC News

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