Fed takes bold steps

First Posted:

WASHINGTON — The Federal Reserve unleashed a series of bold and open-ended steps Thursday designed to stimulate the economy by boosting the stock market and making it cheaper for people to borrow and spend.

The Fed said it will spend $40 billion a month to buy mortgage bonds for as long as it deems necessary to make home buying more affordable. It plans to keep short-term interest rates at record lows through mid-2015 — six months longer than previously planned. And it’s ready to try other stimulative measures if hiring doesn’t pick up.

“The idea is to quicken the recovery,” Fed Chairman Ben Bernanke said at a news conference Thursday. But he made clear he thinks the economy will need the Fed’s intervention even after the recovery strengthens.

Stock prices rose steadily after the Fed’s announcement. The Dow Jones industrial average climbed more than 200 points.

The Fed’s policy committee announced the aggressive actions after a two-day meeting. Its moves pointed to how sluggish the U.S. and global economies remain more than three years after the Great Recession ended.

The actions come a week after the European Central Bank announced its most ambitious plan yet to ease Europe’s financial crisis by buying unlimited amounts of government bonds to help countries manage their debts.

The Fed on Thursday also lowered its outlook for economic growth this year, though it’s more optimistic about the next two years. It expects growth to be no stronger than 2 percent this year. That’s down from its forecast of 2.4 percent in June.

At his news conference, Bernanke made clear that higher stock prices are among the Fed’s goals in buying bonds. Bernanke noted that stock gains increase Americans’ wealth and typically lead individuals and businesses to spend and invest more.

Still, skeptics caution that further bond buying might provide little economic benefit because rates are already near record lows. Critics also warn that more bond purchases raise the risk of higher inflation later.