US Fed ties interest rate to jobless in landmark move

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The Independent Online

The US Federal Reserve renewed its efforts to support the still weak American economy today, unveiling a fresh round of bond buying and, in a landmark move, tying critical interest rate decisions to the health of the jobs market.

The move came as Ben Bernanke, America's top monetary policymaker, lamented the "enormous waste human and economic potential" as the country struggles to get back on its feet following the Great Recession. He spoke after the Fed said it would only begin raising interest rates from near zero levels struck during the financial crisis when the jobless rate falls below 6.5 per cent. It also tied policy to concrete inflationary thresholds, setting a new, more transparent precedent for the way monetary policy decisions are made in the world's largest economy.

But, perhaps mindful of the risk of backing the Fed into a corner, Mr Bernanke clarified that the new approach "by no means puts monetary policy on auto-pilot." The bank, he said, would continue to study a variety of indicators when making interest rate decisions.

Alongside, the central bank also announced plans for a new round of government bond purchases worth $45bn per month to replace Operation Twist, which expires at the year's end, and under which the Fed was buying long term government bonds with the money it raked in be selling shorter term debt. The new round – labelled QE4 by economists – has no such counter; the bank will essentially be crea ting new money to fund an expansion of its balance sheet. This will be in addition to the ongoing $40bn per month of mortgage backed securities that it began buying earlier this year.

The decisions came as Congressional Republicans and the White House attempt to hammer out an agreement that would resolve, or at least lessen, the so called 'fiscal cliff' of automatic tax rises and spending cuts that otherwise will kick in at the beginning of the next year.

"Clearly this is a major risk factor and a major source of uncertainty about the economy going forward," Mr Bernanke said today. The Chairman added that forecasters both at the Fed and beyond were, he suspected, assuming that some kind deal is reached that resolves the cliff in an "intermediate way."

If the political class fails, however, he warned that he didn't think that the "Federal Reserve has the tools to offset that event." Expectations, he suggested, would then have to be tempered accordingly.

This might happen by raising the level of bond buying – but again, this would be action on the margins, he warned. Earlier, in a statement after its last meeting of the year, the Fed's Open Market Committee, which makes collective decisions on key issues including rates, continued to strike a cautious tone on the economy, noting that while "the unemployment rate has declined somewhat since the summer, it remains elevated."