Fed sets inflation, jobless targets for hiking rates

December 13, 2012 - 7:54:11 am


WASHINGTON: The US Federal Reserve laid out target levels on unemployment and inflation for raising interest rates for the first time yesterday, surprising analysts who expected such a move would wait until next year.

Expanding on its strategy of communicating its intentions, after its benchmark rate has been locked at 0-0.25 percent for four years, the Fed said it would not lift rates as long as the inflation outlook was below 2.5 percent and the jobless rate, now at 7.7 percent, stays above 6.5 percent.

Saying the economy continues to grow only at a “moderate” rate, the Federal Open Market Committee also launched a new $45bn a month bond-buying program to replace the expiring Operation Twist.

That will take its total “quantitative easing” asset purchases, aimed at pushing down long-term rates to encourage investment, to $85 billion a month.

Ending a two-day policy meeting, the FOMC said its current “highly accommodative” monetary policy “will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

It said the benchmark interest rate would hold at the current level “at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s two percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

Such a stipulation was far more explicit than previous Fed guidance, which forecast that its easy-money policy would be in place “at least through mid-2015.”

“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of two percent,” the FOMC said in a statement.

The Fed said the US economy continues to grow at a “moderate” pace, despite the destruction along the northeastern coast from Hurricane Sandy.