[Breaking News] Fed to buy more bonds, sets jobless threshold

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By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — The Federal Reserve announced a new bond-buying program Wednesday in fresh action to keep the recovery going in the languishing jobs market and, in a surprise, set thresholds on unemployment and inflation to guide the market about when it will eventually hike rates.

The new purchases of $45 billion of Treasurys are designed to keep the total pace of its asset purchases at $85 billion a month. Without the action, the Fed purchases would have been reduced at year-end when an existing program to swap short-term debt for longer-term Treasurys is set to expire. The Fed said it would keep the $45 billion pace “initially,” suggesting it may review the size of the purchases. Read text of statement.

The Fed also kept its existing program to buy $40 billion a month in mortgage-backed securities.

The Fed purchases are open-ended. The central bank only said it will continue the purchases “if the outlook for the labor market does not improve substantially”

The Fed also kept its federal funds rate target unchanged at a record low range of 0 to 0.25%, where it has been for four years.

In a surprise, the Fed adopted thresholds on unemployment and inflation to guide the market on when it plans to hike the fed funds rate.

The Fed said it would hold rates close to zero while the unemployment rate is above 6.5% as long as inflation does not rise above 2.5%.

Longer-term inflation expectations must be well-anchored, the Fed said.

The point of thresholds is to give market participants a better idea of when the Fed will plan to exit.

The Fed had previously said it expected to keep its rates low until mid-2015.

The vote at the meeting was 11 to 1. Richmond Fed President Jeffrey Lacker dissented for the eighth straight meeting. Lacker opposed the new asset purchases and the new thresholds.

Growth expected to remain lackluster

U.S. economic growth has been lackluster, with so-so consumer spending, lukewarm hiring trends and tepid business investment.

The economy is expected to slow to 1.9% in 2013 from 2.2% this year, according to the November survey of Blue Chip Economic Indicators.

Looming over the outlook are tense negotiations over tax-and-spending policies, the so-called fiscal cliff.

Year-end expiration of Bush-era tax cuts and draconian spending cuts could send the U.S. “toppling back into recession,” Fed Chief Ben Bernanke said last month.

He also urged Congress to raise the federal debt limit.

Bernanke said that the economy would have a “very good year” if a budget deal could be reached.

The unemployment rate has fallen to 7.7% in November from 8.7% in the same month last year. Nonfarm payroll employment has averaged 170,000 per month over the same period.

Bernanke will hold a press conference at 2:15 p.m. Eastern. The Fed will also release updated forecasts.