By Peter Schroeder - 09/13/12 07:55 PM EDT
The Federal Reserve embarked on a broad new effort Thursday to spur the economy just weeks before the presidential election, announcing an open-ended bond-buying program aimed at boosting the labor market until it improves "substantially."
Eyeing an economic recovery that is treading water, and an unemployment rate that refuses to go down, the nation's central bank said it was committed to buying $40 billion in mortgage debt every month. The Fed said the purchases would continue until the agency sees sufficient improvement in the nation's labor market.
Stocks spiked on the news, which had been widely expected by investors. The Dow Jones Industrial Average rose 206.51 points — or 1.6 percent — to close at 13,539.86, its highest level since December 2007.
Fed Chairman Ben Bernanke told reporters Thursday that, after months of disappointing jobs reports and economic growth figures, the central bank felt compelled to step in and try something else to jump-start the recovery.
"We've seen unemployment basically in the same place it was in January," he said at a press conference. "We've seen not enough jobs growth to bring down the unemployment rate, and what we need to see is more progress.
"We're just trying to get the economy moving in the right direction," he added.
The announcement marks a significant new step in the Fed's effort to boost the economy, and also signals the central bank's concern about the weak recovery from the recession.
The most significant aspect of the Fed's new move is the fact that it is open-ended. In its statement, the Fed did not set a ceiling for new bond purchases or a time frame — it merely said it would continue making purchases until the labor market "improves substantially," and would look to use additional policy tools if job growth remained laggard.
The Fed added that it did not plan on revoking support at the first signs of a quicker recovery, and that highly accommodative monetary policy would remain in place "for a considerable time" after the recovery strengthens.
When asked what the Fed was looking for in deciding when to end its new program, Bernanke declined to offer specifics. He said the Fed was taking a qualitative approach.
"We want to see more jobs. We want to see lower unemployment. We want to see a stronger economy," he said. "We, at least at this point, have decided to define it qualitatively."
At the same time, Bernanke maintained that the Fed alone did not have all the tools needed to save the economy, again urging Congress to adopt policies to support the recovery — or at least keep it from falling off the so-called "fiscal cliff."
"Monetary policy, as I've said many times, is not a panacea," he said. "We're looking for policymakers in other areas to do their part. We'll do our part."
Republican presidential nominee Mitt Romney and GOP lawmakers immediately pounced on the Fed's decision, arguing it was an indictment of President Obama's economic record that they said would fail to rescue the president from a defeat in November's election.
Romney's campaign said the GOP candidate would enact policies leading to a more robust economic recovery.
"The Federal Reserve’s announcement of a third round of quantitative easing is further confirmation that President Obama’s policies have not worked," said Lanhee Chen, policy director for Romney's campaign. "After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn’t need more artificial and ineffective measures. We should be creating wealth, not printing dollars."
The decision comes less than two months before a presidential election expected to turn on voter perceptions of the economy. The Fed's actions gave the GOP a rallying point from which to lob attacks on Obama's failure to invigorate the economy.
"The Federal Reserve’s action today is a scathing indictment of this administration’s economic policies which, after almost four years, have failed to produce a sustainable recovery or put Americans back to work," House Financial Services Committee Chairman Spencer Bachus (R-Ala.) said in a statement. "The Federal Reserve cannot rescue the administration from the consequences of failed economic and regulatory policies."
"The actions of the Federal Reserve today make one thing clear: the economic policies of the current administration have failed miserably," added House Majority Whip Kevin McCarthy (R-Calif.).
Sen. Bob Corker (R-Tenn.), who spent the last several days publicly urging the Fed to avoid further efforts, said the new move could wreak havoc on Bernanke's legacy.
"I’m disappointed in the Federal Reserve’s actions today and truly believe Chairman Bernanke is beginning to do serious damage to the Fed as an institution," he said. "Open-ended purchases of mortgage-backed securities will politicize the Fed and add substantially to its balance sheet risks, but it will not help our economy’s long-term growth prospects."
Democrats jumped into the mix as well, criticizing Republicans as they praised the Fed for doing more for the economy.
"The Fed is fulfilling its obligation to take action to address unemployment. Now congressional Republicans need to fulfill theirs," said Sen. Charles Schumer, a Senate Banking Committee member who has publicly urged Bernanke to do more.
Rep. Barney Frank (D-Mass.), the ranking member on the House Financial Services Committee, hailed the Fed's move while assailing the GOP for putting pressure on the central bank.
"It is welcome and entirely appropriate that the Federal Reserve acted today to take aggressive additional steps to support economic recovery," he said. "But it is unfortunate that Republicans already have expressed disappointment in this action and are clearly upset that they were unable to intimidate the Fed into putting partisan politics ahead of national economic interests."
Frank pushed back against the notion political motivations guided the Fed's moves. He noted Bernanke was first an economic adviser to former President George W. Bush before being named Fed chairman by him. He was reappointed to the position by Obama.
The Fed's move could be the boldest yet taken by the nation's central bank to support an economic recovery that has failed to gain substantial steam, as gains in the labor market and economic growth have been barely sufficient to keep up with the nation's population growth.
All members of the Federal Open Market Committee (FOMC) voted to support the new effort except Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond. Lacker opposed the additional purchases and the decision to extend its policy of keeping interest rates near zero.
Republicans have argued further attempts by the Fed to stimulate the economy would have little impact and instead encourage inflation down the road.
Rep. Scott Garrett (R-N.J.) suggested the Fed's actions could finally spur Congress to revoke its mandate to maximize employment, requiring it to focus exclusively on controlling inflation.
"Today’s actions by the Federal Reserve reinforce what many of us in Congress believe: the Federal Reserve is in need of fundamental reform to return its focus to its core mission of conducting monetary policy and away from trying to run the entire $3 trillion U.S. economy," he said.
This story was updated at 5:15 p.m.