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December 12. 2012 8:20PM

Fed makes new rate pledge as it launches fresh stimulus

WASHINGTON - In an unprecedented step, the Federal Reserve said on Wednesday it would hold interest rates near zero until the U.S. unemployment rate falls to 6.5 percent as it launched a new round of bond purchases to stimulate the economy.

The central bank said its commitment to hold rates steady until its new threshold was reached would hold as long as inflation was projected to be no more than 2.5 percent one or two years ahead and inflation expectations were contained.

Fed officials, who revised their forecasts for economic growth and inflation next year lower, replaced a more-modest expiring stimulus program with a fresh round of Treasury debt purchases.

"The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the Fed's policy-setting panel said in a statement.

Fed officials committed to monthly purchases of $45 billion in Treasuries on top of the $40 billion a month in mortgage-backed bonds they started buying in September, as financial markets had expected.

Under the "Operation Twist" program that will expire at the end of the month, the Fed was buying $45 billion in longer-term Treasuries with proceeds from the sale and redemption of short-term debt. The new round of government bond-buying it announced Wednesday will be funded by essentially creating new money, further expanding the Fed's $2.8 trillion balance sheet.

Fed policymakers voted 11-1 to back the new plan. Richmond Federal Reserve Bank President Jeffrey Lacker dissented, as he has at every meeting this year, expressing opposition both to the bond buying and the new economic thresholds.

Stocks added to earlier gains and long-term government bond prices fell on the Fed's announcement.

"They see an anemic economy, and they're doing all they can to get any economic progress," said Alan Lancz, president of Alan B. Lancz & Associates in Toledo, Ohio.

In its statement, the Fed noted unemployment remains elevated and that inflation is running somewhat below the central bank's 2 percent objective.

Policymakers repeated a pledge to keep buying bonds until the labor market outlook improved substantially, although they said their long-term asset purchase program would end well before they raise rates.

A drop in the jobless rate to 7.7 percent in November from 7.9 percent in October was driven by workers exiting the labor force

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