PhotoNoting that information received since the Federal Open Market Committee (FOMC) met in August suggests that economic activity has continued to expand at a moderate pace in recent months, the Federal Reserve says it will move to stimulate the economy. 

To that end, the Federal Reserve has agreed to purchase additional agency mortgage-backed securities at a pace of $40 billion per month. The FOMC said it will also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. 

These actions, which together will increase the Fed'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 help make broader financial conditions more accommodative. 

Latest findings 

In making the announcement, the FOMC said growth in employment has been slow and the unemployment rate remains elevated. Additionally, household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, according the the committee, albeit from a depressed level. While inflation has been subdued, the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable. 

The committee says it is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The FOMC also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. 

Hand on the tiller 

The committee says it will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, it will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the FOMC will, as always, factor in the likely efficacy and costs of such purchases. 

The FOMC also decided to keep the target range for the federal funds rate -- a key interest rate --at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

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