- The Washington Times - Wednesday, December 12, 2012

The Federal Reserve on Wednesday announced a new easing program to boost the U.S. economy and said for the first time that it will keep interest rates near zero until unemployment falls below a newly established threshold of 6.5 percent.

The U.S. central bank had never before set a formal target for the level of unemployment or inflation, but did so Wednesday with a near-unanimous vote of its rate-setting panel, the Federal Open Market Committee. Other global central banks typically have a formal inflation target, but few have also established such a goal for jobs.

Fed Chairman Ben S. Bernanke said in a news conference that the 6.5 percent jobless rate is actually a threshold at which the Fed will consider raising interest rates, and is not the central bank’s formal “target” for reducing unemployment. He said the Fed’s real target — the so-called “full employment” rate where joblessness lands in a fully recovered economy — is actually between 5.2 percent and 6 percent, but the Fed wants to stop easing before that level is achieved so as not to risk an uptick in inflation.

“The 6.5 percent should not be interpreted as the committee’s long-term objective for unemployment,” Mr. Bernanke said, while disclosing that the real goal is the somewhat lower range of 5 percent to 6 percent.

The goal shows that the Fed’s expectations for the economy have fallen substantially since the Great Recession sent unemployment soaring. While 6 percent is substantially below today’s 7.7 percent unemployment rate, it is far above the 4 percent unemployment level that prevailed from the late 1990s through 2008.

In addition to establishing formal targets for the first time, the Fed launched a new easing program to replace an expiring one called Operation Twist in which the Fed sold the short-term Treasury securities in its vast holdings and replaced them with longer-term issues. Operation Twist was scheduled to expire at the end of the year, and the Fed reportedly was running out of short-term securities to sell under the program.

Under the new program approved Wednesday, the Fed said it will print money to purchase $45 billion a month of long-term Treasury securities in the open market — reviving a highly controversial technique for propping up the economy. The Treasury purchases will be in addition to the $40 billion of Fannie Mae and Freddie Mac mortgage bond purchases the Fed is making each month.

The Fed said its goal with the “quantitative easing” or “QE” programs is to “maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

In his lengthy press briefing, Mr. Bernanke warned Congress and the White House that the budget standoff at the “fiscal cliff” already is having a marked effect on the economy, and will get a lot worse if the impasse continues into the new year. He noted that consumer confidence, small-business confidence, investment and hiring in manufacturing all have fallen recently, apparently as a result of worries over the more than $500 billion in tax increases and spending cuts scheduled to take effect on Jan. 1 if the White House and Congress cannot reach an agreement.

“Clearly, the fiscal cliff is having effects on the economy” and is a “major risk factor” that could hit the financial markets and economy next year, he said, although the Fed is assuming that the budget issues ultimately will be resolved with only a minor impact on the economy.

Mr. Bernanke acknowledged that global financial markets currently appear “complacent” because investors — like the Fed — expect a solid budget deal to emerge from the negotiations. But they could be bitterly disappointed if that doesn’t happen.

“I certainly hope that markets don’t have to tank to get a budget deal,” he said, while noting that is exactly what happened in 2011 when Washington was at an impasse over raising the federal government’s debt limit.

At that time, in August 2011, the Dow Jones Industrial Average plummeted more than 600 points in one day.

To avoid any possibility of crashing the markets and getting another downgrade from Wall Street credit agencies, “it’s best for the economy to at least achieve a framework for further negotiation to achieve a sustainable path for fiscal consolidation,” even if Congress chooses to just punt the deadlines further into next year, he said.

Mr. Bernanke sought to downplay the significance of the Fed’s new employment target, saying it was aimed primarily at making clear to the public and financial markets just when the Fed might start raising interest rates again. The Fed has held short-term interest rates at close to zero since late 2008, when the economy was in the midst of a financial crisis.

Still, it was the first time the Fed has adopted such goals after decades of discussion about whether to do so.
All of the Fed’s 12-member committee members voted for the new targets and easing program except one — Jeffrey Lacker, the hawkish and conservative president of the Fed’s Richmond reserve bank, who has called for tighter policies out of concern that the Fed’s current extremely lax policies will eventually stoke inflation.

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