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UPDATE: Fed Boosts Bond Buying Plan, Sets Unemployment Target Of 6.5%

UPDATE: Fed Boosts Bond Buying Plan, Sets Unemployment Target Of 6.5%

The Federal Reserve on Wednesday stepped up its efforts to combat unemployment and insulate the broader economy from potential shocks related to the fiscal cliff crisis.

The central bank announced a new bond-buying program worth $45 billion per month of longer-term Treasurys. This is addition to the $40 billion per month in mortgage-backed securities that the Fed has already committed to purchase.

"The committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens," the Fed's policy-making committee said in a statement issued after a two-day meeting in Washington.

In a departure from its earlier pledge to keep interest rates at historically low levels until mid-2015, the Fed will hold off on rate hikes until the unemployment rate falls to 6.5 percent.

Policy makers do not see the unemployment rate falling to 6.5 percent until 2015, according to the Fed's economic projections that were also released today.

"The conditions now prevailing in the job market represent an enormous waste of human and economic potential," Fed Chairman Ben Bernanke said at a press conference explaining the decision. "A return to broad-based prosperity will require steady improvement in the job market, which in turn requires stronger economic growth."

The Fed gave one condition for its specific target on unemployment: inflation one to two years ahead must project to be no more than 2.5 percent.

However, most policy makers do not expect inflation to approach that level in the next three years, with estimates for core price inflation topping at 2 percent in 2015.

Some members of the Open Market Market Committee have expressed concerns that the Fed risks runaway inflation by keeping rates so low for so long. However, inflation hawk Jeffrey Lacker of the Richmond Fed was the lone dissenting vote today.

Bernanke said that meeting the unemployment threshold will not trigger an automatic interest rate hike. The 6.5 percent unemployment rate should not be viewed as the Fed's long-term goal, he added.

The economy is plodding along at a "moderate pace," according to Bernanke, but the jobs market remains weak despite a recent drop in the unemployment rate to 7.7 percent.

He warned that Fed support cannot fully offset the downside risks presented by the so-called fiscal cliff. Bernanke expects Congress to reach a deal, but noted that inaction has already resulted in a troubling drop in business confidence.

Looking further out, the Fed slightly lowered its economic growth forecast for the next three years.

Economic activity will pick up in 2013 compared to this year, but the Fed now sees relatively lackluster growth somewhere between 2.3 percent and 3 percent. The September projection forecast a minimum of 2.5 percent growth.

The upper end of 2015 forecast was dropped from 3.8 percent growth to 3.7 percent.

by RTT Staff Writer

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