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Breaking down the Fed’s latest announcement

Published: Friday, Sept. 14, 2012 1:15 a.m. CST

WASHINGTON (AP) – The Federal Reserve launched a new mortgage bond-buying program Thursday and said it plans to keep short-term interest rates at ultra-low levels until the middle of 2015. The goal is to encourage more borrowing and spending.

Here are some questions and answers about the Fed’s announcement:

Q: Why did the Fed take these steps?

A: Fed Chairman Ben Bernanke wants to speed up growth and spur more hiring. At a news conference Thursday, Bernanke noted that 5 million Americans have been out of work for 6 months or longer. Long-term unemployment can erode skills and make it harder to find new jobs. The economy also faces ongoing challenges, Bernanke said, including Europe’s financial crisis and stagnant economy, which has reduced U.S. exports, and spending cuts by federal, state and local governments.

Q: The Fed has tried to stimulate the economy before. What’s different about the latest effort?

A: Since the 2008 financial crisis, the Fed has purchased more than $2 trillion in Treasury bonds and mortgage-backed securities. The bond purchases are known as “quantitative easing.”

What’s different this time is the Fed purchases are open-ended: The Fed has not set a limit for the number of bonds it will buy, nor has it said how long it will keep buying the bonds. The Fed has simply said it will keep purchasing mortgage-backed securities until the job market improves “substantially.” It will start at a pace of $40 billion a month.

If the job market doesn’t improve, the Fed said it would step up its purchases. It also said it would keep interest rates ultra-low “for a considerable time after the economic recovery strengthens.”

Q. Will it help the economy?

A. Most economists say the benefits will be small. Mortgage rates are already near record lows and that has helped lift home sales. Still, sales remain below healthy levels, in part because many people can’t qualify for a loan or save enough money for larger down payments required by banks.

Ryan Sweet, an economist at Moody’s Analytics, said the additional bond-buying could add a few tenths of a percentage point to economic growth. But Paul Edelstein, an economist at IHS Global Insight, said the impact of lower mortgage rates on growth and unemployment will “probably be imperceptible.”

Bernanke says the previous bond purchases created up to 2 million jobs. But he acknowledged at Thursday’s news conference that Fed policy “is not a panacea” and won’t solve all the economy’s problems. The Fed predicts growth won’t exceed 2 percent this year, although it forecasts that growth will pick up next year to as much as 3 percent.

 

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