WASHINGTON – The Federal Reserve sent its clearest signal to date Wednesday that it will keep interest rates super-low to boost the U.S. economy even after the job market has improved significantly.
The Fed says that it plans to keep its key short-term rate near zero until the unemployment rate reaches 6.5 percent or less – as long as expected inflation is tame. Unemployment is now 7.7 percent.
That plan adds detail to what the Fed had said before: that it expects to keep the rate low until at least mid-2015. For the first time, the Fed is making clear to investors and consumers that it will link its actions to specific economic markers.
“This approach is superior” to setting a timetable for a possible rate increase, Fed Chairman Ben S. Bernanke said at a news conference. “It is more transparent and will allow the markets to respond quickly and promptly to changes” in the Fed’s economic outlook.
Bernanke made clear that even after unemployment falls below 6.5 percent, the Fed might decide that it needs to keep stimulating the economy. Other economic factors will also shape its policy decisions, he said.
In a statement after its final policy meeting of the year, the Fed said that it will also keep spending $85 billion a month on bond purchases to drive down long-term borrowing costs and stimulate economic growth.
The Fed will spend $45 billion a month on long-term Treasury purchases to replace a previous bond-purchase program of an equal size. And it will keep buying $40 billion a month in mortgage bonds.
“The Fed has become more explicit and more transparent,” said Steven Wood, chief economist at Insight Economics. “This should provide the markets with much more clarity around monetary policy action in the upcoming year.”
With its new purchases of long-term Treasurys, the Fed’s investment portfolio, which is nearly $3 trillion, would swell to nearly $4 trillion by the end of 2013 if its bond-purchase programs remain in place.
The policies are intended to help an economy that the Fed says is growing only modestly.
Stocks and bond yields rose after the Fed’s statement was released. The Dow Jones industrial average was little changed just before the Fed news crossed at 12:30 p.m. Eastern time and jumped by 69 points shortly after.
The yield on the benchmark 10-year Treasury note rose to 1.69 percent, from 1.65 percent, as investors sold ultrasafe investments and moved money into stocks.
The Fed’s plan to keep stimulating the economy at least until unemployment has reached 6.5 percent is intended to reassure consumers, companies and investors, said Joseph Gagnon, a former Fed official who is a senior fellow at the Peterson Institute for International Economics.
Having only a target date of mid-2015 for any increase in interest rates “sounded gloomy,” as if the economy would remain weak until then, Gagnon said. Specifying an unemployment rate – close to a normal rate of 6 percent or less – makes clear that the Fed will keep stimulating the economy.
“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 stimulating the economy. It expects unemployment to remain at least 7.4 percent next year and 6.8 percent by the end of 2014. The earliest it sees unemployment dropping below 6.5 percent is the end of 2015.
It expects the economy to grow no more than 3 percent next year before picking up to 3.5 percent in 2014 and 3.7 percent in 2015.
Bernanke has said that the Fed’s efforts will not be able to rescue the economy if the budget negotiations fail and the country does go over the “fiscal cliff.” If higher taxes and government spending cuts were to last for much of 2013, most experts say, the economy would sink into another recession.