The Federal Reserve launched a fresh effort to support a struggling U.S. economy on Wednesday, committing to buy $600 billion in government bonds despite concerns the program could do more harm than good.
The decision takes the Fed into largely uncharted waters and is aimed at further lowering borrowing costs for consumers and businesses still suffering in the aftermath of the worst recession since the Great Depression.
The U.S. central bank said it would buy about $75 billion in longer-term Treasury bonds per month through the end of June 2011 and could adjust purchases depending on the strength of the recovery.
"The economy is slowly digging itself out of a deep hole," said Brian Bethune, economist at IHS Global Insight in Lexington, Massachusetts. "The Fed is making the right moves here to nudge the pace up a little," he said.
Critics within and outside the central bank fear the Fed's policy will lead to high inflation and worry that low interest rates in the United States risk fueling asset bubbles in other countries and destabilizing currencies.
But with the U.S. economy expanding at only a 2.0 percent annual pace in the third quarter of this year and the jobless rate seemingly stuck around 9.6 percent, the Fed had come under pressure to do more to stimulate business activity. HIGH
UNEMPLOYMENT, LOW INFLATION
In the Fed's post-meeting statement, policymakers described the economy as "slow" and said employers remained reluctant to create jobs. They also called inflation "somewhat low."
"Progress toward (our) objectives has been disappointingly slow," the Fed said, referring to its dual mandate to maintain price stability and foster maximum sustainable employment.
Still, these domestic goals appeared to be creating troubles abroad. The prospect of ultra-low returns in the United States have driven investors into higher-yielding emerging markets, pushing those currencies higher and sparking anxiety over a loss of export competitiveness.
"We are all under attack by the relaxed monetary policy of the United States," Colombian Finance Minister Juan Carlos Echeverry told investors on Tuesday.
With 14.8 million Americans unemployed, factories operating well short of capacity, and inflation well below the range the Fed would prefer, some officials at the central bank see the risk of a vicious deflationary cycle where consumers hold off on purchases, choking off economic growth.
Fed Chairman Ben Bernanke, in an opinion piece posted on the Washington Post's web site on Wednesday, said policymakers could not sit idly by given the anemic economic backdrop. He argued that fears that unconventional monetary policy would spark a future bout of inflation were "overstated."
"Inflation that is too low can pose risks to the economy — especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation, which can contribute to long periods of economic stagnation," Bernanke wrote.
