Fed promises low rates until jobs picture improves
The central bank will buy more bonds to keep interest rates at ultra-low levels until unemployment drops below 6.5%. A goal is to try to offset any fiscal cliff effects. Stocks churn higher, then fade.
The Federal Reserve reaffirmed its commitment Wednesday to low interest rates for an indefinite period of time, a move that ensures low costs on mortgages, auto and business loans and government and corporate bonds.
The central bank agreed to keep the target on its federal funds rate -- the foundation on which all U.S. interest rates are built -- at 0% to 0.25%. And it agreed to expand dramatically its bond-buying programs to ensure that rates will, in fact, stay low.
More importantly, the Fed said that it will keep rates low as long as the national unemployment rate is above 6.5% and inflation is no more than a half-percentage point above its target range of 2% a year. This is the first time the Fed has tied its monetary policy to the unemployment rate.
Financial markets were pleasantly surprised by the move at first. What was a solid rally faded, however, into the close as markets picked up on Fed Chairman Ben Bernanke's worries about how the economy would be hurt if Congress and the White House can't agree on a plan to avoid the fiscal cliff. That is a combination of tax increases and spending cuts designed to reduce the deficit.
The Dow Jones industrials ($INDU) and Standard & Poor's 500 Index ($INX) were slightly ahead before the announcement and moved higher when the statement was released. The Dow rallied up as many as 81 points, but the blue chips lost all of the gain, finishing down 3 points to 13,245.
The S&P 500 closed up 1 point 1,428. The Nasdaq Composite Index ($COMPX) was down 8 points to 3,014. The Nasdaq-100 Index ($NDX) was off 8 points to 2,675. Apple (AAPL) was a big reason for the Nasdaq-100's decline, falling $2.64 to $538.75.
Global markets had closed higher ahead of the decision.
Gold (-GC) moved up to $1,717.90 an ounce, a gain of $8.30. Crude oil (-CL) in New York settled at $86.77 a barrel, up 98 cents.
The central bank said the economy continued to expand "at a moderate pace." It noted, however, that job growth continues to be slow. The November unemployment rate was 7.7%, down from October's 7.9% but only because of a decline in the work force.
The Fed statement came at 12:30 p.m. ET. It was followed by a release of new Fed economic projections at 2 p.m, just before Bernanke's news conference began.
Payroll employment was up by a lukewarm 146,000 in November, just under the 2012 average of 150,000 jobs created every month. But jobs expanded at more than 230,000 a month in December 2011 and January and February 2012.
The Fed's projections see unemployment hovering at current levels through the end of the year and falling slightly in 2013. The projections represent the views of the presidents of the 12 Federal Reserve banks and the 7 members of the Federal Reserve Board.
Growth in gross domestic product, the common measure of economic activity, were projected at 1.7% to 1.8% in 2012 and expand to 2.3% to 3% in 2013. Neither is an especially good growth rate.
One motivation in the Fed's thinking has been that it needs to try to offset the effects of the fiscal cliff set to kick in on Jan. 1 unless the Obama administration and Congress can agree to a deal. But Bernanke warned at his news conference that the Fed can not offset all the effects of the fiscal cliff provisions, which were part of a 2011 budget act.
Many economists believe that, if the government goes over the cliff, the result will be fewer jobs created as the economy sinks back into recession.
At his news conference Wednesday afternoon, Bernanke said the worries about the political problem are hurting the economy already. Businesses are deferring investment decisions and are holding back on hiring new workers. The Fed can mitigate some of the cliff's effects, Bernanke said, its overall set of tools won't be able offset all of the effects.
The odds of getting around the fiscal cliff appeared to be sinking on Wednesday. Democrats don't believe Republicans are serious about compromise and say the GOP will fight President Obama's proposal to boost tax rates on the most affluent Americans to the bitter end.
The president did agree, reports said, to consider lowering the top corporate income tax rate from 35%.
Republicans, meanwhile, complain that the Democrats aren't serious about cutting spending.
The noise Wednesday is that a deal won't be struck until after Christmas at the earliest.
The Fed's decision included an agreement to change what's been called Operation Twist. That's a program to sell short-term Treasury securities and buy longer-term issues. This will be replaced by a new program that the media have dubbed QE4 (short for Quantitative Easing, round 4) that buys in Treasury and mortgage-backed bonds at a rate of $45 billion a month that's not offset by sales of other securities. That goes with a program to buy mortgage-backed securities at a rate of $40 billion a month.
The decision to tie the Fed's stimulus to the unemployment rate was a new wrinkle to try to help the economy fully recover from the 2008-2009 financial crash. A 6.5% unemployment rate is not the Fed's goal, Bernanke said, but it's a signal that the Fed needs to start thinking about raising the cost of credit. The idea was formulated during the fall, Bernanke said. The Fed announced it on Wednesday because Bernanke was scheduled to hold a news conference.
The big question is if the bond-buying programs are having much effect on the domestic economy. Job creation is modest at best. GDP is probably growing at a rate of 2% or less.
Consumers increasingly are worried about the fiscal cliff and are giving hints they may curtail their own spending.
But auto sales have been showed solid gains all year, and many housing markets are beginning to expand thanks to low mortgage rates, declining inventories of foreclosed homes, and some confidence that job markets are stable.
There are two risks to the Fed's low-interest-rate policy. One is a new bout of inflation. The other is that companies and deal-makers will assume greater risks on selling bonds to finance new ventures.
More from Money Now
Not much bang for the buck this time around. Too much of the froth in this market is already Fed money, even the big boys are getting scared of it.
I take it as a sign that the Fed is shooting blanks right now. It's all up to Congress from here on. Feel better? Since the Fed has to keep printing until Congress actually does something, I'd be betting on inflation real soon.
hey America get with the program!!! welfare for you all!!! don't work? no problemo!!! why just saunter up to your nearest welfare handout establishment and get a new phone!!! food stamps!!! plasma TV!!! oh hell, it's not fair white folks got dem fancy shmancy BMW's and such, so Bimmer's for all my niggaz!!!!, or Benz's, or Bentlys's whateva!! whateva my niggaz!!! whatchu want?? I gots dis!! I got's dis!!! I'm barrack hussein osama and I got's dis!!! why they stole 'em from you to begin with!!! the rich stole from the poor!! yea, sure right, straight up, stole from the poor 'ol poor!!!
ah... ( meanwhile in realityland ) oh that's right, the poor hand nothin' to begin with and when Romney said he'd get people back to work, they said, fckkk that!! gimme that ol stash of obama's!!
all kiddin' aside though people, we're sooooooo fcked right now, it's kinda like a delayed reaction, we're sooooooo fcked, that it hasn't hit the pain centers of our brains yet, right now the shock, and then the pain, much like workin' out a bit too much, you don't feel the muscle aches until 'bout 24 to 48hrs later heh, but that's a good pain, but this? what's goin' on right now in this country, is beyond a complete disaster, think we need new words to describe this armageddon!
Q:How about the world economy?
OBAMA IS DRIVING NAILS IN YOUR COFFIN AS WE SPEAK!!!!!
HELL - THE WHOLE US GOVERNMENT IS HELPING HIM - ALONG WITH THE MEDIA - STUPID VOTERS - HILLARY - MUSLIMS - THE 47% - DETROIT - AND TOO MANY OTHERS TO NAME!!!
The DC thugs (Unions) including Bam-Bam and Bernake are getting closer to really destroy the US.
I can see soon that we will be filled with POT smoke everywhere...just wonder how many times Obama is inhaling...?
I AM FED UP
GET THE FED OUT OF MY LIFE
Now lets see. The fed is a private bank that loans money to the Gov. They have loaned 3 trillion. Now I have to ask who is it that has that much money? You can't find out who these people are and I wonder where they keep their assets. Very strange
More money printed out of thin air to buy bonds, it's called debt monetization for people who are not up on economics. This is the last vestige of a dying economy and typically only resorted to by banana republics. The reason that this criminal private banking cabal known as the "Fed" can't raise interest rates is that the U.S. would default on higher interest payments on the national debt and debt based money in circulation. Last year alone the interest payment owed to the 'Fed" was over 470 billion for the year. Nearly all income taxes extorted from the public goes to debt payments rather than making our lives better. Remember folks, the banksters always get paid even if it means us getting the the shaft with austerity. The future is looking very bleak for the common man, get out of the country if you have the means to do so.
Why do people so easily fall for propaganda, blame some small group or minority for all of your problems, it has always worked down through history and here we go again. Tax the rich, great propaganda line keeps us from focusing on the real problem (JOBS). If the President gets his tax hike on those making over 250,000 a year it will run the country for 8 days at the current rate of spending. What are we suppose to do for the 357 days that remain. We need to figure out how to get the big corporations to bring back our jobs. They already have all the tax codes rigged they are laughing at us because both parties work for them. All the stimulus plans are just delaying the
Obummer to Bennie......... How do we get out of this QE addiction Wall Street has?
Bennie to Bummer ..... Well I will say we will keep it up until the employment picture gets better and you drive us off the cliff so the unemployment numbers will appear to be better.
WAIT A DAMN MINUTE! OBAMA AND PELOSI AND DEMOCRATS AND PMSNBC AND
EVERYBODY JUST SAID THE JOB NUMBERS WERE UP AND UNEMPLOYMENT DOWN!!!
BUT THEN OBAMA AND PELOSI SAID UNEMPLOYMENT IS GOOD FOR THE ECONOMY!
AND NOW BERNACKEEEE SAYS SOMETHING DIFFERENT! 3 DIFFERENT STORIES?
WHERE'S THE LIBERAL MEDIA? FUNNY HOW THE SAID ROMNEY LIED ABOUT ALL KINDS
OF STUFF WITHOUT PROOF OR JUST PLAIN LIES BUT OBAMA AND DEMOS JUST PLAIN
LIES AND THEY CAN'T REPORT ON IT CAUSE THEY DON'T HAVE ENOUGH FACTS!
So the first 3 QE's didn't help, operation twist didn't help, low rates haven't helped, so really it makes perfect sense to continue with more of the same stuff that hasn't worked ......right?
These actions are not about unemployment or the the economy they are about keeping the rates down so institutions can borrow for nothing and buy USA treasuries even with little return as they are paying no interest. It is a scheme to fund itself and delay collapse a little longer.
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The market's cheap money addiction is laid bare. No one knows how it will end.