The central bank also extended a plan to keep short-term interest rates at record lows - close to zero - until mid-2015, or six months longer than it had planned. And it said it’s ready to take other steps even after the economy improves under a ‘‘highly accommodative stance of monetary policy’’. The plan ‘‘The idea is to quicken the recovery,’’ Fed chairman Ben Bernanke later told a news conference. But he made it clear he thinks the economy will need the Fed’s intervention even after the recovery strengthens, saying the country’s employment situation ‘‘remains a grave concern’’. A new Fed forecast said it thinks unemployment, now at 8.1 per cent, won’t fall below 8 per cent this year. "If the outlook for the labor market does not improve substantially, the committee will continue its purchase 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," the Fed said in a statement.

In an additional move that reflects just how concerned Fed officials are about the economy, policymakers said they would not likely raise interest rates from current rock-bottom lows until at least mid-2015. Previously, it had set such guidance at late 2014. "To support continued progress toward maximum employment and price stability, the committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens," the central bank said. "They are definitely stepping up," said William Larkin, a portfolio manager at Cabot Money Management. "It creates an inflation outlook concern because if you are doing it for this extreme for this length of time, my biggest question is what is going to happen to inflation in two years?" Pushing on a string? The decision comes in the face of widespread questions about the likely effectiveness of a further foray into unorthodox monetary policy, including from Republican presidential nominee Mitt Romney.

Senator John Cornyn, head of the Senate Republican Campaign Committee, said the Fed appeared to be "trying to juice the economy" ahead of the presidential election to help Obama. "It looks to be political," he said. Brazilian Finance Minister Guido Mantega said he would keep a close eye on the impact of the Fed's monetary easing on Brazil's real currency. Mantega had accused the Fed's earlier bond buying of unfairly weakening the US dollar. In its statement, the Fed said the fresh MBS purchases, which it will start on Friday, would come on top of its so-called Operation Twist program, in which it is selling short-term bonds to buy longer-term Treasury debt. "These actions, which together will increase the committee's holdings of longer-term securities by about $US85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and to help make broader financial conditions more accommodative," it said. The latest purchases build on the $US2.3 trillion in US government and housing-related debt the Fed has already bought.

In the Fed's first two rounds of so-called quantitative easing, dubbed QE1 and QE2, the central bank bought bonds closer to a pace around $US100 billion per month. 'Swallowing the key' By buying mortgage-linked debt, the Fed hopes to press mortgage costs lower and force investors into other assets, lowering their yields as well. Those lower borrowing costs should spur greater lending activity and foster faster economic growth, officials believe. US economic growth cooled in the second quarter, coming in at a tepid 1.7 per cent annual rate, and forecasters do not believe it is doing much better now. The economy created just 96,000 jobs last month, less than needed to keep up with population growth. While the unemployment rate edged down to 8.1 per cent, it was only because so many Americans gave up on the search for work.

The Fed will provide fresh forecasts that could show softer projections for economic growth and higher unemployment, which would help provide a rationale for its decision. Loading Stephen Stanley, an economist Pierpont Securities in Stamford, Connecticut, said that by tying its purchases to progress reducing US unemployment, the Fed had "basically locked on the handcuffs and swallowed the key." Reuters, with AP

