Fed To Spend $45B To Sustain Bond Purchases
The previous target for any increase in interest rates "sounded gloomy," as if the economy would remain weak until then, Gagnon said.
Specifying an unemployment rate â¿¿ one close to a normal rate of 6 percent or less â¿¿ makes clear that the Fed will keep supporting the economy even after the job market has strengthened significantly.
"This is trying to get away from that sense of 'Oh, my God, this is all about gloom and doom,' " Gagnon said.
The Fed's new plan to link any rate increase to specific levels of unemployment and inflation mirrors a proposal pushed by Charles Evans, president of the Federal Reserve Bank of Chicago.Updated forecasts that the Fed released Wednesday illustrate why it thinks it should continue helping the economy. It expects unemployment to remain at least 7.4 percent next year and 6.8 percent by the end of 2014. It predicts the economy will grow no more than 3 percent next year before picking up to as much as 3.5 percent growth in 2014 and as much as 3.7 percent in 2015. The Fed said it can pursue the aggressive stimulus programs because inflation remains below its target of roughly 2 percent annually over the long run. The statement said officials think the Fed can keep its benchmark short-term rate near zero as long as its one- to two-year inflation outlook doesn't exceed 2.5 percent. The statement was approved 11-1. Jeffrey Lacker, president of Federal Reserve Bank of Richmond, objected for the eighth straight time this year. Lacker has said he thinks the job market is being slowed by factors beyond the Fed's control. And he says further bond purchases risk worsening future inflation. The latest bond-buying program would replace an expiring program called Operation Twist. With Twist, the Fed sold $45 billion a month in short-term Treasurys and used the proceeds to buy the same amount in longer-term Treasurys.
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