Picture: THINKSTOCK
Picture: THINKSTOCK

WASHINGTON — The Federal Reserve on Wednesday took the unprecedented step of saying it would keep interest rates near zero until the jobless rate falls to 6.5%, well below its current level, and it promised to pump more money into the economy.

The central bank said its commitment to hold rates steady until its new unemployment threshold was reached would hold as long as inflation was projected to be no more than 2.5% one or two years ahead and inflation expectations were contained.

The decision, accompanied by an announcement to replace a more-modest and expiring stimulus programme with a fresh round of Treasury debt purchases, came as a surprise. Most economists had not expected the central bank to adopt thresholds for policy until sometime next year.

"The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions," the Fed’s policy-setting panel said in a statement.

Fed officials committed to monthly purchases of $45bn in Treasuries on top of the $40bn per month in mortgage-backed bonds they started buying in September, as financial markets had expected.

Under the "Operation Twist" programme that will expire at the end of the month, the Fed was buying $45bn in longer-term Treasuries with proceeds from the sale of short-term debt. The new round of government bond-buying it announced on Wednesday will be funded by essentially creating new money, further expanding the Fed’s $2.8-trillion balance sheet.

Fed policymakers voted 11-1 to back the new plan. Richmond Federal Reserve Bank president Jeffrey Lacker dissented, as he has at every meeting this year, expressing opposition both to the bond buying and the new economic thresholds.

Reuters