WASHINGTON - The Federal Reserve on Thursday took a series of extraordinary actions to stimulate the economy and reduce unemployment, capping four years of effort by the U.S. central bank to protect the economy from a long decline.
The measures sought to reassure investors, home buyers and businesses that the Fed plans to boost growth for years to come, as worry mounts that Washington's paralyzed politics will sink the fragile recovery.
The Fed's steps were in many ways remarkable: For the first time, it made a definitive promise that it would keep interest rates ultra-low even if the economy starts to recover. That sent a clear signal that for years it will be cheap for consumers to borrow to buy homes and cars or for businesses to get loans to expand.
To reinforce the point, the Fed said it will buy $40 billion per month in mortgage bonds in addition to $45 billion in Treasury bonds through the end of the year, a process known as "quantitative easing." After that, the Fed will reassess its actions, but it is likely to continue buying tens of billions of dollars of mortgage bonds unless the economy suddenly shows signs of a major rebound.
Four years after the financial crisis nearly sent the nation into a depression, the Fed's actions underscored both the painful slowness of the recovery and the reality that the central bank is the only government entity willing to do anything about it. Fed leaders are worried that growth remains lackluster even though the central bank has injected more than a trillion dollars of new money into the economy, defying fears of critics that such continued intervention could spark inflation. The Fed said it expects to support the economy at least through mid-2015.
"This is sort of like: Whatever it takes. It strikes me as one of the most aggressive statements of policy by a modern central bank," said John H. Makin, a scholar at the American Enterprise Institute. "I think their fear is if they're not this aggressive, the economy will just stagnate and we'll have long-run unemployment, and a loss of productivity and a long period of substandard growth."
Stocks rise on news
The stock market was buoyed by the news. The Dow Jones industrial average rose 1.55 percent, to 13,539.86, while the Standard & Poor's 500-stock index climbed 1.6 percent to close at 1459.99. The yield on the 10-year Treasury bond fell nearly 2 percent.
In afternoon remarks, Fed Chairman Ben Bernanke explained that the Fed no longer expected economic growth to pick up enough to materially reduce the 8.1 percent unemployment rate. He said the Fed will remain vigilant in ensuring that the central bank's efforts to stimulate the economy don't lead to rising prices, but said he saw little risk the economy would "overheat" and cause inflation.
Addressing the plight of 12.5 million jobless Americans, Bernanke used evocative language that made him sound more like an activist crusading to help the unemployed than the reserved professor he once was.
"The weak job market should concern every American. High unemployment imposes hardship on millions of people and it entails a tremendous waste of human skills and talents," Bernanke said. "Five million Americans have been unemployed for more than six months, and millions more have left the labor force, many of them doubtless because they've given up on finding suitable work."
The actions taken Thursday marked a new chapter in the Fed's approach to dealing with the slow economic recovery.
In 2008 and 2009, the Fed intervened in the market to help end the financial crisis by cutting interest rates and buying up Treasury and mortgage bonds. In 2010, it launched a second round of easing, buying up Treasury bonds to fight deflation, or falling prices, a dangerous phenomenon that can wreak havoc on a nation's economy and well-being.
Many economists say those actions prevented the economy from falling into a depression and helped support the economic recovery, the housing market and the stock market.
But the central bank seems to be acknowledging that its actions - providing people and businesses with an ample supply of cheap loans - have been inadequate. A critical measure of the labor market, the employment-to-population ratio, is worse than it was at the start of the year.
'Lost decade' feared
The Fed seems worried that the country could face years of high unemployment, a problem that could prevent the U.S. economy from ever regaining its luster. In other words, the Fed appears to want to avoid the type of "lost decade" that afflicted Japan, which suffered what economists call a liquidity trap when its economy didn't grow despite extremely low interest rates.