The bond buying will continue until employment improves.
That's the message the Federal Reserve
delivered when it announced it will take new steps to boost the sluggish recovery including buying an additional $40 billion of mortgage debt every month
for the foreseeable future.
"The employment situation remains a grave concern," Fed Chairman Ben Bernanke said at an afternoon news conference to explain the central bank's decisions.
The Fed said the fresh security purchases, which it will start on Friday, would come on top of its so-called Operation Twist program, in which it is selling short-term bonds to buy longer-term Treasury debt.
"These actions, which together will increase the committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and to help make broader financial conditions more accommodative," the Fed said in a statement.
As if to punctuate its concern about the unemployment rate, which policymakers said "remains elevated," the Fed also asserted it would extend its current monetary policy by keeping interest rates at historic lows until at least mid-2015 from late-2014 previously.
The latest purchases build on the $2.3 trillion in U.S. government and housing-related debt the Fed has already bought.
Investors cheered the Fed's announcement. The Dow Jones industrial average, already at its highest level in nearly five years, jumped after the announcement and was up 184 points in afternoon trading.
"They are definitely stepping up," William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts, said of the central bank's decision.
Some politicians were less than happy, however. Sen. Bob Corker, R-Tenn., a member of the Senate Banking Committee accused Bernanke of politicizing the Fed.
"I'm disappointed in the Federal Reserve's actions today and truly believe Chairman Bernanke is beginning to do serious damage to the Fed as an institution. Open-ended purchases of mortgage-backed securities will politicize the Fed and add substantially to its balance sheet risks, but it will not help our economy's long-term growth prospects," said Corker.
Bernanke addressed some of his critics during his news conference, especially the argument that the Fed's moves are akin to fiscal spending, that the low interest rates hurt savers and that it will spur inflation.
Bernanke said the Fed's spending is not the same as government spending because the Fed buys financial assets and not goods and services. He said that earnings from the securities it buys are remitted to the Treasury and ultimately will help reduce rather than increase the deficit.
He argued that while low interest rates indeed hurt savers, they also support other assets such as homes and businesses. Low rates impose some costs, but Americans will benefit by the jobs that easier monetary policy will create, he said.
Bernanke said the Fed is committed to both sides of its mandate, to achieve maximum employment and to keep inflation in check. He said the Fed has the tools and will to act if inflation begins to rise outside of its average target range of about 2 percent.
He added that while he doesn't think the Fed's moves are a panacea, they could nudge the economy in the right direction. He reiterated that he hoped lawmakers would address the so-called "fiscal cliff" of tax increases and spending cuts that could come in the new year because the Fed doesn't have the tools to address the fiscal shock that could occur if Washington fails.
The Fed's moves come amid signs that hiring has slowed, which could hurt President Barack Obama's chances of re-election in November against his GOP rival, former Mass. Gov. Mitt Romney.
The economy created a tepid 96,000 jobs in August, well below the 250,000 jobs economists think are needed
to show robust growth. The unemployment rate dropped to 8.1 percent from 8.3 percent but mainly because so many Americans found it futile to continue to look for work.
On Thursday, the Labor Department reported that weekly jobless claims rose by a higher-than-expected 15,000 to 382,000. While the department attributed about 9,000 of those seasonally adjusted new claims to Tropical Storm Isaac, the increase in claims showed a labor market heading in the wrong direction.
"I hate to react negatively to one week's data, but the labor situation in the country is ugly
," said Wayne Kaufman, chief market analyst at John Thomas Financial.
U.S. economic growth cooled in the second quarter, coming in at a tepid 1.7 percent annual rate, and forecasters do not believe it is doing much better now.
The Fed's move to purchase more mortgage debt may be partly aimed at aiding the housing sector, which has shown signs recently of renewed health. "The housing sector has shown some further signs of improvement, albeit from a depressed level," the Fed said.
The pace of foreclosures has slowed, according to data released Thursday by RealtyTrac, which tracks home seizures. But banks have turned to short sales, in which a lender agrees to accept less than the full mortgage balance when a home is sold, to avoid the expense of maintaining and then selling a foreclosed home.
The Fed also said inflation remains subdued, although the prices of some key commodities have increased recently. Two of those, food and fuel, helped drive wholesale prices higher last month by the most in three years.
Reuters contributed to this report