Questions and answers on the Fed’s latest actions
Posted at: 12/12/2012 4:06 PM
By CHRISTOPHER S. RUGABER
(AP) WASHINGTON - The Federal Reserve on Wednesday stepped up its drive to boost economic growth and lower unemployment. It’s changing its criteria for when it might start raising its key short-term interest rate from a record low near zero. It will also keep buying Treasury bonds to keep long-term rates low and encourage more borrowing and spending.
Here are some questions and answers about the Fed’s policy actions and guidance:
Q. What new steps did the Fed take?
A. The Fed is linking future hikes in its key short-term interest rate to economic conditions, rather than a rough timetable. The Fed now says it plans to keep the rate near zero at least until the unemployment rate has fallen below 6.5 percent and inflation doesn’t appear likely to top 2.5 percent within two years. The Fed also said it will continue spending $85 billion a month on bond purchases. It will spend $45 billion each month on long-term Treasury purchases, replacing a program that was set to expire at the end of the year. And it will keep buying $40 billion a month in mortgage-backed securities. The bond purchases are intended to lower long-term rates and encourage more borrowing and spending.
Q. What difference does the change in guidance over interest rate policy make?
A. It provides a clearer statement to investors and businesses that they will be able to borrow cheaply until unemployment is back to healthier levels. The Fed hopes that will boost economic growth. The Fed also said it will keep rates low even as the job market improves significantly. The unemployment rate is currently 7.7 percent. Previously, the Fed said it planned to hold rates down until at least mid-2015. That created some confusion because many investors assumed that meant the Fed was projecting a weak economy until that time. It also wasn’t clear how improvements in the economy or hiring would affect that target. And the Fed’s willingness to accept higher inflation of 2.5 percent _ above its target of 2 percent _ reinforces that the Fed will keep rates near zero for as long as it can.
Q. Why is it making this change at this time?
A. Most economists expected the Fed to adopt the new guidance next year. By moving now, it’s possible that Fed Chairman Ben Bernanke is trying to get a jump on the "fiscal cliff," the package of tax increases and spending cuts that are scheduled to kick in next year. Unless the White House and Congress can reach a deal to replace the cliff, it could push the economy into recession. But in a news conference Wednesday Bernanke reiterated his view that the Fed’s actions can’t fully offset the impact of the cliff.
(Copyright 2012 by The Associated Press. All Rights Reserved.)