WASHINGTON (CN) – The Federal Reserve on Wednesday said it would inject $600 billion into the U.S. economy by buying government bonds over the next eight months, as the economic recovery since the recession has been “disappointingly slow.”
“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the [Federal Open Market] Committee decided today to expand its holdings of securities,” the committee, which sets monetary policy, said in a press release Wednesday.
The committee is made up of the seven members of the Fed’s board of governors, the president of the Federal Reserve Bank of New York, and four other reserve bank presidents.
“Employers remain reluctant to add to payrolls,” the committee said. “Housing starts continue to be depressed.”
Though consumer spending has risen in recent months, unemployment remains close to 10 percent and credit markets are still tight. Additionally, investment in nonresidential structures, such as restaurants and office buildings, continues to be weak, and income levels are rising only modestly.
The Fed said it plans to purchase $600 billion in long-term Treasury bonds at a pace of about $75 billion per month until the end of June 2011.
“The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed,” Fed Chair Ben Bernanke said in an op-ed piece Thursday explaining the decision.
He said the plan was part of the Fed’s efforts to meet its federally mandated goals to promote high employment levels and low, stable inflation.
Bernanke expressed confidence in the move, though he acknowledged that asset purchases, as opposed to measures such as cutting short-term interest rates, was a “less familiar” tool for promoting economic growth.
“This approach eased financial conditions in the past and, so far, looks to be effective again.” Bernanke said. He said stock prices rose and long-term interest rates fell when investors caught wind of the Fed’s possible move, and those trends could push mortgage rates down and boost consumer confidence.
In the months following the 2008 financial crisis, the Fed bought up more than $1 trillion worth of government bonds in an effort to reduce long-term interest rates.
The Fed will continue to reinvest repayments of principal on its holdings of securities, Bernanke said.
The committee will maintain the federal funds interest rate at zero to a quarter of a percent.
Voting for the measure were committee chair Bernanke, vice chair William Dudley, and members James Bullard, Elizabeth Duke, Sandra Pianalto, Sarah Bloom Raskin, Eric Rosengren, Daniel Tarullo, Kevin Warsh and Janet Yellen.
Thomas Hoenig, president of the Kansas City Fed, voted against the policy, voicing concerns that the high level of asset purchases would increase expectations of long-term inflation that could destabilize the economy.
In response to critics of the measure, Bernanke said, “Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation.”