Stocks up after Fed announces buying plan

WASHINGTON, Sept. 13 (UPI) -- The U.S. Federal Reserve said Thursday it will increase purchases of mortgage-backed bonds, a move the Mitt Romney campaign said proves the economy needs help.

After the Fed's Open Market Committee said the central bank had set a target of spending $85 billion per month at least through the end of the year, Romney for President Policy Director Lanhee Chen said, "the Federal Reserve's announcement ... is further confirmation that President Obama's policies have not worked."

"After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn't need more artificial and ineffective measures. We should be creating wealth, not printing dollars," Chen said, referring to the third round of bond buying, which is often called printing money or quantitative easing for its effect on the dollar's value.

Asked about the Fed action, White House press secretary Jay Carney told reporters the administration does not comment on the Fed.

Wall Street was already showing gains when the Fed announced the policy, but the announcement was followed by gains that drove the Dow Jones industrial average and Standard & Poor's 500 to their highest levels since December 2007.

By close of trading, the Dow gained 206.51 points, or 1.55 percent, to 13,539.86. The tech-heavy Nasdaq Composite index added 41.52 points, or 1.33 percent, to 3,155.83. The S&P 500 added 23.43 points, or 1.63 percent, to 1,459.99.

At a news conference following the Fed announcement, Chairman Ben Bernanke said Federal Reserve bank presidents and governors meeting during the past two days engaged in "considerable discussion" about the implications of "fiscal policy uncertainty" on hiring and investment.

"A lot of firms are waiting to see whether that problem will be resolved," he said. "And if so, how? And I think it is a concern. It is something that is affecting behavior now."

However, he said he doesn't know how much of an effect uncertainty is having.

He said the housing market is "one of the missing pistons in the engine here, housing is usually a big part of a recovery process. We haven't had that nearly to the usual extent." But he said housing prices "are beginning to rise in some markets, which will encourage people to look at homes, will encourage lenders to make more mortgage loans."

Bernanke said the central bank anticipates inflation as a normal feature of recovery, "given that the economy fell very quickly and there's a lot of unused capacity, there's a lot of slack in the economy, it would be normal that there would be a period the economy would grow faster than trend in order to make up some of the slack that was created."

However, Bernanke said "we don't anticipate the economy is going to be overheating anytime soon. And as long as we pay close attention to inflation expectations as well as the trajectory of the economy, we think inflation will remain close to our 2 percent target."

The Fed's Open Market Committee said the central bank had agreed to buy mortgage-backed securities at a pace of $40 billion per month and "extend the average maturity of its holdings of securities as announced in June," which is a program of turning over the proceeds of short-term maturing bonds into purchases of long-term bonds, a step known as an operational twist.

In addition, the Fed said it would maintain an existing policy of reinvesting principal payments from its debt portfolio in agency mortgage-backed securities.

The actions, valued at about $85 billion each month, "should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accomodative," the Fed said.

The FOMC noted it would keep its overnight refund rate at the historic low of zero to 0.25 percent, and said that would "likely to be warranted at least through mid-2015," which extends its estimate of how long the central bank's key interest rate would be held near zero.

The Fed was under considerable pressure to take action this week, as Fed Chairman Ben Bernanke endorsed making a move in speeches should the economy not find more traction.

In addition, the European Central Bank took a dramatic step after its most recent policy meeting, announcing it would buy bonds in certain conditions from countries struggling to climb out of debt.