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Fed turnaround tonic

Washington, Sept. 13: The US Federal Reserve opened a new chapter on Thursday in its efforts to accelerate the American economic recovery, saying it would expand its holdings of mortgage-backed securities, and potentially undertake other new policies, until unemployment drops sufficiently or inflation rises too fast.

The Fed said it would add $23 billion of mortgage bonds to its portfolio by the end of September and then announce its plans for October as part of a new process that aims to prioritise the Fed’s economic objectives.

The Fed also said, in a statement following a meeting of its policy-making committee, that it now expects to hold short-term interest rates near zero until at least mid-2015, extending the forecast it made in January by about half a year.

The statement said the economy had continued to expand “at a moderate pace”, but that the Fed had concluded “growth might not be strong enough to generate sustained improvement in labour market conditions”.

That has been true for months, perhaps years, but implicit in the statement was the Fed’s conclusion that the situation was no longer acceptable. Eleven members of the committee voted for the action; Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented, as he has at each meeting this year.

The Fed said that its actions “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative”.

On Wall Street, traders welcomed the moves. The benchmark Standard & Poor’s 500-share index was up 0.9 percent, or 12.30 points, to 1448.86 at midday, rising further as investors had more time to digest the news.

The Fed’s plan went further than many investors had expected by providing an open-ended commitment. But stocks have been rising in recent weeks, partly in anticipation of the Fed taking more measures to support the economy.

“There weren’t many more accommodative options the Fed could have gone with,” said Dan Greenhaus, the chief global strategist at BTIG, an institutional broker.

The scale of the new effort is significantly smaller than the Fed’s previous rounds of asset purchases. The Fed purchased about $100 billion in securities each month during those campaigns.

It said on Thursday that it would target a rate of about $40 billion a month during the current campaign, although unlike those earlier efforts, the volume is now subject to adjustment.

The new purchases will mark the first time in more than two years that the Fed has expanded its holdings of mortgage bonds. That decision reflects the Fed’s view that the housing market still needs help, and that lower rates on mortgage loans could provide significant benefits for the broader economy.

 
 
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