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Fed to spend $45B to sustain bond purchases

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. The Associated Press
Wednesday, December 12, 2012 - 1:33 pm

WASHINGTON – The Federal Reserve will spend $45 billion a month to sustain an aggressive drive to keep long-term interest rates low. And it says it plans to keep a key short-term rate near zero until unemployment drops below 6.5 percent.

The policies are intended to help an economy that the Fed says is growing only modestly with 7.7 percent unemployment in November.

Stocks and bond yields rose after the Fed's statement was released Wednesday after its final policy meeting of the year. The Dow Jones industrial average was little changed just before the Fed news crossed at 12:30 p.m. Eastern time and jumped 69 points shortly after.

"The Fed is aggressively trying to add to the economy's strength," said Jim O'Sullivan, chief economist at High Frequency Economics.

The Fed said it will direct the money into long-term Treasurys to replace an expiring bond-purchase program. The new purchases will expand its investment portfolio, which has reached nearly $3 trillion.

The central bank will continue buying $40 billion a month in mortgage bonds. All told, its monthly bond purchases will remain $85 billion. They are intended to reduce already record-low long-term rates to encourage borrowing and accelerate growth.

The Fed said it will continue the bond purchases until the job market improves substantially. It said it can pursue the aggressive stimulus programs because inflation remains below its target.

The Fed also kept its target for its benchmark short-term interest rate at a record low near zero, where it has been for the last four years. The Fed said Wednesday that it would link any future rate change to lower unemployment, as long as inflation is expected to stay below 2.5 percent.