Fed vows to keep rates low until unemployment falls to 6.5 percent

The Federal Reserve on Wednesday promised to keep interest rates near zero until unemployment dips below 6.5 percent or inflation climbs above 2.5 percent, linking monetary policy to specific targets for the first time.

The central bank also announced it was expanding its efforts at "quantitative easing" and is now committed to buying $45 billion in Treasury bonds per month, beginning in 2013, to complement the monthly purchases of $40 billion in mortgage debt that are already under way.

Setting explicit numerical targets for Fed action is a new effort by the central bank to further inform markets about its overall economic goals. Previously, the Fed had announced new efforts to stimulate the economy by setting end dates for the support.

But in September, when the Fed announced its latest round of easing, it left it open-ended, saying it would continue the purchases until it saw significant improvement in the labor market. Now Fed officials are specifying exactly what they will need to see in the economy before they take their foot off the gas.

“What it’s basically doing is saying how our policy would evolve over time as the economy evolves,” said Fed Chairman Ben Bernanke in a press conference following the announcement. “We think it’s a better form of communication.”

Bernanke emphasized that the targets are not hard triggers for Fed action, but rather should be seen as guideposts for when the Fed would tighten policy. In fact, the central bank could keep rates near zero even if unemployment dipped below 6.5 percent, if it thought it appropriate, he added.

“It, by no means, puts monetary policy on autopilot,” he said.

He also emphasized that the 6.5 percent target does not represent the Fed’s goal for the unemployment rate. Instead, the Fed aims to adjust its policies before the unemployment rate hits its lowest levels because monetary policy tends to operate with a lag.

A key frustration for Bernanke is persistently high unemployment, in particular as it affects those who have been without work for a long time. He noted Wednesday that 5 million people have been without work for over six months.

“The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” he said.

The Fed said that when it decides the time has come to roll back its accommodative policy, it would do so in a "balanced approach," taking into account both its goal of maximum employment as well as controlled inflation.

The Federal Open Market Committee (FOMC) statement also revealed an expanded attempt to lower borrowing rates by the Fed. At the beginning of the year, the Fed will begin buying $45 billion of longer-term Treasury debt every month, to supplement its monthly purchases of $40 billion in mortgage debt, which began in September.

Bernanke emphasized that these asset purchases were not similarly tied to an explicit unemployment target. Instead, the Fed will regularly adjust its purchases based on a broad assessment of the economy.

“The committee intends to be flexible in varying the pace of securities purchases,” he said.

The new policy moves reflect the Fed's assessment that the economy continues to expand "at a moderate pace," notwithstanding disruptions caused by extreme weather like Hurricane Sandy. However, the Fed remains concerned that the economy is still too weak to stand on its own two feet.

"The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the FOMC said. "Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."

All but one FOMC member supported the expanded action. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented, as he has on previous stimulative pushes.

— This story was updated at 5:50 p.m.