Fed to pump $40bn a month into US economy

14 Sep 12
The US Federal Reserve has announced a new quantitative easing programme to support the country’s economic recovery and help create new jobs.

By Nick Mann | 14 September 2012

The US Federal Reserve has announced a new quantitative easing programme to support the country’s economic recovery and help create new jobs.

Dubbed ‘QE3’, the measure will involved the Fed buying $40bn a month of mortgage debt – mortgage-backed securities – with the aim of lowering borrowing costs and stimulating the housing market to create jobs.

Announcing the programme yesterday, Federal Reserve chair Ben Bernanke said the action was needed because of ‘grave concern’ over the US unemployment rate. The Fed’s board members yesterday reaffirmed their June forecast for the country’s jobless rate to remain at 8–8.2% this year, before falling to 7–7.6% next year, 6.7–7.3% in 2014 and 6–6.8% in 2015.

‘While the economy appears to be on a path of moderate recovery, it isn’t growing fast enough to make significant progress reducing the unemployment rate,’ Bernanke said.

‘The programme of MBS purchases should increase the downward pressure on long-term interest rates more generally, but also on mortgage rates specifically, which should provide further support to the housing sector by encouraging home purchases and refinancing,’ he added.

Bernanke said the asset purchasing programme would continue until there was a recovery in both the jobs market and the wider US economy.

‘If we do not see substantial improvement in the outlook for the labour market, we will continue the MBS purchase programme, undertake additional asset purchases, and employ our policy tools as appropriate until we do.

‘We will be looking for the sort of broad-based growth in jobs and economic activity that generally signal sustained improvement in labour market conditions and declining unemployment,’ he added.

Bernanke stressed that the QE programme was not comparable to government spending, because it was buying financial assets and not goods and services.

‘In fact, the odds are strong that the Fed’s asset purchase programmes, both through their net interest earnings and by strengthening the overall economy, will help reduce rather than increase the federal deficit and debt.’

He warned, however, that the US economic outlook remained uncertain, with ‘headwinds’ including the eurozone crisis, tight credit and the fiscal contraction taking place domestically at federal, state and local levels.

‘In addition, strains in global financial markets continue to pose significant downside risks,’ he added.

In light of this, the Fed board cut its growth forecasts for the US economy for this year from 1.9–2.4%, as predicted in June, to 1.7–2%. Gross domestic product is then expected to grow by 2.5–3% next year and between 3–3.8% in 2014 and 2015.

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