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The US Federal Reserve has said it plans to keep interest rates at close to
zero at least until the US unemployment rate falls below 6.5%.
The Fed previously had a date-driven target, rather than a data-driven one.
The Fed also said it will continue to buy $85bn ( 53bn) a month of government
bonds and mortgage-backed securities to try to boost the economy.
But changes in the way it does this will mean more money is pumped into the
economy.
"The committee remains concerned that, without sufficient policy accommodation,
economic growth might not be strong enough to generate sustained improvement in
labour market conditions," the Fed said in a statement.
US stocks rose after the announcement. The Dow Jones, which had been little
changed before the statement, jumped 70 points to 13,318.
Numerical thresholds
Interest rates in the US have been close to zero for several years now, and the
Fed again kept them at below 0.25%.
But in a surprise move, the Fed adopted numerical thresholds for future
interest rate policy, something which had not been expected until next year. It
said that it expects to keep rates at this exceptionally low range as long as:
the unemployment rate remains above 6.5%
inflation between one and two years ahead is projected to be no more than a
half percentage point above the committee's 2% longer-run goal
longer term inflation expectations continue to be well anchored
The Fed had previously said it expected to maintain rates at their current
level until 2015.
What is "Operation Twist"?
Programme first used by the Fed in 1961 to help stimulate the economy
Its nickname comes from both the Twist dance craze of the time and the intended
twisting of the yield curve of US debt
Involves the Fed selling short-term bonds, causing their interest rate or yield
to go up, and buying long-term bonds, causing their yield to fall
It does not put any new money into the economy, but aims to keep long-term
interest rates low
Why did the Fed 'twist' back in 1961?
But in a news conference, Fed chairman Ben Bernanke said the modified
formulation did not mean any change in the committee's expectations. It still
anticipates holding rates at the exceptionally low range "at least through
mid-2015".
Moreover, the stated threshold of 6.5% should not be interpreted as the
committee's longer run target for unemployment, which remains at 5.2-6.0%, Mr
Bernanke said.
By tying future monetary policy more explicitly to economic conditions, it
should make it more transparent, he said.
Increasing portfolio
Under the Fed's current programme "Operation Twist", which expires at the end
of the year, the central bank sells short-term bonds in order to buy $45bn a
month of longer term bonds.
It does not put any new money into the economy, but aims to keep long-term
interest rates down and encourage individuals and businesses to borrow and
spend more.
But the Fed has run out of short-term debt to sell, so in order to maintain its
pace of long-term Treasury purchases and to keep long-term rates low, it must
spend more to boost its portfolio.
Crisis jargon buster
Bond
A debt security, or more simply, an IOU. The bond states when a loan must be
repaid and what interest the borrower (issuer) must pay to the holder. They can
be issued by companies, banks or governments to raise money. Banks and
investors buy and trade bonds.
The central bank's latest policy meeting came against the backdrop of the
looming "fiscal cliff" - the tax increases and spending cuts due to be
implemented in January if Congress and the White House do not strike a deal.
This may have proved a factor in its decision-making as Mr Bernanke said last
month that all of the changes would "pose a substantial threat to the
recovery".
Fears of the cliff have led some companies to delay investing and hiring, while
consumers have also cut back on spending.
The Fed has pledged to keep on bond buying until the labour market outlook
improves substantially.
Though the unemployment rate fell to a four-year low of 7.7% in November,
statistics suggest that much of the decline in the jobless rate since 2008 has
been due to people dropping out of the workforce, either due to retirement or
because they have given up seeking work.
The central bank also revised its economic outlook. It now expects the economy
to grow between 1.7-1.8% this year and 2.3-3.0% next year.
In September it had forecast growth of 1.7-2.0% in 2012 and 2.5-3.0% in 2013.