The Federal Reserve said it will expand its holdings oflong-term securities with open-ended purchases of $40 billion ofmortgage debt a month in a bid to boost growth and reduceunemployment.

“If the outlook for the labor market does not improvesubstantially, the committee will continue its purchases of agencymortgage-backed securities, undertake additional asset purchasesand employ its other policy tools as appropriate,” the Federal OpenMarket Committee said today in a statement at the end of a two-daymeeting in Washington.

The FOMC said it would likely hold the federal funds rate nearzero “at least through mid-2015.” Since January, the Fed had saidthe rate was likely to stay low at least through late 2014. The Fedsaid “a highly accommodative stance of monetary policy will remainappropriate for a considerable time after the economic recoverystrengthens.”

Chairman Ben S. Bernanke is enlarging his supply ofunconventional tools to attack unemployment stuck above 8 percentsince February 2009, a situation he has called a “grave concern.”The decision risks provoking a renewed backlash from Republicans,including presidential nominee Mitt Romney, who say Bernanke'spolicies threaten to ignite inflation while doing little to spurthe economy.

The Fed said it will continue its program to swap $667 billionof short-term debt with longer-term securities to lengthen theaverage maturity of its holdings, an action dubbed Operation Twist.The central bank will also continue reinvesting its portfolio ofmaturing housing debt into agency mortgage-backed securities.

“The committee is concerned that, without further policyaccommodation, economic growth might not be strong enough togenerate sustained improvement in labor market conditions,” thestatement said.

Richmond Fed President Jeffrey Lacker dissented for the sixthconsecutive meeting, saying he opposed additional asset purchases.Lacker opposed the FOMC's June decision to extend Operation Twistthrough the end of the year and has said he expects interest rateswill need to be raised in 2013.

The Fed will issue forecasts for unemployment, growth, inflationand interest rates at 2 p.m. today, and Bernanke is scheduled tospeak at a press conference starting at 2:15 p.m. inWashington.

Today's Fed meeting comes less than two weeks after Bernanke'sAug. 31 speech in Jackson Hole, Wyoming, when he lamented the stateof the labor market and defended his “nontraditional policies,”saying “the costs, when considered carefully, appearmanageable.”

Stock Rally

Growing expectations of additional stimulus have helped propel arally in stocks and commodities. The Standard & Poor's 500Index rose 4.5 percent through yesterday since the Fed's laststatement on Aug. 1 to near the highest level in more than fouryears. The S&P GSCI Spot Index of 24 commodity prices has risen7.1 percent.

Weak employment data has increased pressure on the central bankto act. The Labor Department said Sept. 7 that the economy added96,000 jobs in August, less than forecast by economists and downfrom a 141,000 increase in July. Average hourly earnings werelittle changed, and 368,000 Americans left the labor force.

Other reports have shown that manufacturing, one of themainstays of the three-year expansion, has been weakening. TheInstitute for Supply Management's factory index showed a thirdstraight month of contraction in August as it fell to the lowestlevel since July 2009.

“We have seen no net improvement in the unemployment rate sinceJanuary,” Bernanke said in his Jackson Hole speech. “Unless theeconomy begins to grow more quickly than it has recently, theunemployment rate is likely to remain far above levels consistentwith maximum employment for some time.”

Economic growth slowed to a 1.7 percent annual pace in thesecond quarter from 4.1 percent in the final three months of lastyear. Growth will average 2.1 percent next year, according to themedian forecast in a Bloomberg News survey of economists, and thejobless rate will average 7.9 percent.

Intel Corp., the world's largest semiconductor maker, on Sept. 7slashed its third-quarter sales forecast citing declining demandfor personal computers from corporate customers in a weakeningeconomy.

FedEx Corp., operator of the world's largest cargo airline, saidSept. 4 that earnings for the quarter ended Aug. 31 will be shortof its forecast after a weak global economy damped revenue.

Staff Cuts

Some companies are planning to reduce staff. Printer makerLexmark International Inc. on Aug. 28 announced plans to eliminate1,700 jobs globally. Hewlett-Packard Co., the world's largestpersonal-computer maker, said Sept. 10 that it would cut 29,000jobs, an expansion of a reorganization plan first announced inMay.

Bernanke, a scholar of the Great Depression, has deployed themost aggressive monetary policies since the Fed's founding nearly acentury ago as he battled the 2007-2009 financial crisis, helpedpull the nation out of the worst recession since the 1930s and thensought to keep the expansion going.

The Fed lowered its target interest rate to zero in December2008 and undertook two rounds of large-scale asset purchases thatswelled its balance sheet to almost $3 trillion from less than $900billion in December 2007, when the recession began.

After the second round of asset purchases started in November2010, Republican congressional leaders, including Congressman JohnBoehner of Ohio and Senator Mitch McConnell of Kentucky, the headof the party in their respective chambers, wrote a letter toBernanke saying the action could ignite inflation, weaken thedollar and generate speculative bubbles.

Republican presidential candidate Mitt Romney has said hewouldn't reappoint Bernanke when his term ends in January 2014.Glenn Hubbard, the Columbia University Business School dean andRomney adviser, has said additional bond purchases by the Fed woulddo little to shore up the economy.

“I don't think that another round of quantitative easing isgoing to have a material effect on the recovery,” Hubbard said inan Aug. 31 interview on Bloomberg Television. “Lowering the 10-yearyield by another handful of basis points isn't going to move theneedle.”

Representative Paul Ryan of Wisconsin, Romney's vicepresidential running mate, yesterday said the Fed is “trying tomake up for failed fiscal policy.”

The central bank is “trying to bail out the fact that thepresident hasn't led, that the Senate hasn't passed a budget, thatwe have a horrible economic policy coming from our regulations andfrom our tax policy,” Ryan said at a campaign event inWisconsin.

Fed district bank presidents, includingRichmond's Jeffrey Lacker, Philadelphia's Charles Plosser andDennis Lockhart of Atlanta, have also raised concerns aboutinflation or whether more Fed action would help fuel growth.

Bernanke, in his Jackson Hole speech, cited a Fed study showingthat large-scale asset purchases may have raised the level ofeconomic output by almost 3 percent and boosted private payrollemployment by more than 2 million jobs.

What's more, Bernanke said, Fed the purchases have created “fewif any” disruptions to market functioning, and there are no signsthe expanding balance sheet has “materially affected inflationexpectations.”

Still, Bernanke said monetary policy is “not a panacea” and hisremarks have highlighted “two main sources of risk” facing the U.S.economy: Europe's sovereign debt crisis and the prospect of abruptfiscal tightening in the U.S.

Europe cleared a hurdle in its debt crisis yesterday whenGermany's top constitutional court rejected efforts to block theEuropean Stability Mechanism, a 500 billion-euro ($645 billion)bailout fund.

The U.S. is also vulnerable to the so-called fiscal cliff, the$600 billion of tax increases and spending cuts that will kick inautomatically at the end of the year unless Congress acts. TheCongressional Budget Office said in an Aug. 22 economic report thatfiscal tightening of that magnitude could cause a recession.

“We've got a U.S. economy where we have looming tax increasesthat are quite significant, we have looming spending cuts in thegovernment which are quite significant,” Michael DeWalt, thedirector of investor relations for Peoria, Illinois-basedCaterpillar Inc., said in a Sept. 6 presentation. A lot ofcustomers are “unsure about what to do, highly uncertain aboutwhere it's going to go at the end of the year.”

Bloomberg News

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