Ben S. Bernanke for the first time pledged that the FederalReserve will buy bonds until the economy gets closer to his goals,cementing his place as the Fed's most innovative chairman andsignaling the battle against unemployment eclipses any concernsabout inflation for now.

The central bank yesterday announced its third round oflarge-scale asset purchases since 2008, with the difference that itdidn't set any limit on the ultimate amount it would buy or theduration of the program. Instead, Bernanke said stimulus will beexpanded until the Fed sees “sustained improvement” in the labormarket.

Bernanke is “going to fight and fight until he sees a realimprovement in the economy,” said Ethan Harris, co-head of globaleconomics research at Bank of America Corp. in New York. “He's notgoing to let his critics stop him. He believes quantitative easingcan help the economy and the Fed can avoid inflation, so he'll justkeep at it until there's a real turn in the economy.”

Stocks rallied, sending benchmark indexes to the highest levelssince 2007, and gold climbed after the Fed announced it would buy$40 billion of mortgage debt a month. The central bank alsoextended the prospect of near-zero interest rates until mid-2015and said policy will stay accommodative “for a considerable time”even after the economy strengthens.

“This is a Main Street policy, because what we're about here istrying to get jobs going,” Bernanke said at a news conferenceyesterday in Washington. “We're trying to create more employment.We're trying to meet our maximum employment mandate, so that's theobjective.”

Harris, a former researcher at the Federal Reserve Bank of NewYork, said he expects the Fed to continue buying bonds until theunemployment rate, which was 8.1 percent in August, declines to 7percent. The rate has been stuck above 8 percent since February2009, when the nation was still mired in a recession.

When the Fed's current program to swap short-term Treasurieswith longer-term securities expires at the end of the year, thecentral bank will also start outright purchases of U.S. governmentdebt, according to Harris, the author of “Ben Bernanke's Fed: TheFederal Reserve After Greenspan.”

Bernanke said he isn't worried about the economy “overheatingany time soon” and that the Fed has delivered on its mandate ofprice stability since the mid-1990s. Central bankers can usecommunication tools like the interest-rate guidance into 2015 toease policy because they have “considerable credibility,” hesaid.

Inflation Expectations

That history enables Bernanke to add to his stimulus withoutunhinging inflation expectations, said Neal Soss, chief economistfor Credit Suisse Group AG in New York.

“As he himself said, the Fed has built up a lot of capital withrespect to inflation credibility,” said Soss, a former New York Fedeconomist. “The point of having capital is, from time to time, tospend it.”

Marvin Goodfriend, a former policy adviser at the Richmond Fed,said Bernanke, who has been chairman since 2006, is benefiting fromthe credibility established by his predecessors, Alan Greenspan andPaul Volcker.

Greenspan solidified his reputation for fighting inflation byraising rates 3 percentage points between February 1994 andFebruary 1995, which later allowed him to let the unemployment ratedecline to 4 percent in 2000 while inflation climbed to 2.4percent, Goodfriend said.

Bernanke and his colleagues are “presuming their credibility forlow inflation which is, I think, far from proven,” said Goodfriend,an economics professor at Carnegie Mellon University's TepperSchool of Business in Pittsburgh. Yesterday's announcement may alsosignal “the Fed is willing to risk higher inflation expectationsand is even willing to tolerate it.”

Inflation expectations climbed yesterday to their highest levelsince May 2011, as measured by the break-even rate for five-yearTreasury Inflation Protected Securities.

The rate rose to 2.21 percentage points from 1.92 points on Aug.30, the day before Bernanke signaled in Jackson Hole, Wyoming, thathe might add to his stimulus. The rate, a yield difference betweenthe inflation-linked debt and comparable maturity Treasuries, is ameasure of the outlook for consumer prices over the life of thesecurities.

Yesterday's FOMC decision immediately sparked a renewed backlashfrom Republicans critical of Bernanke's policies.

“The Fed is overly confident about its ability to pick the righttime to withdraw all this stimulus,” Representative Kevin Brady, aTexas Republican who is vice chairman of the Joint EconomicCommittee, said in an interview. “Controlling the fire of inflationonce it is roaring is a difficult task.”

Dual Mandate

The Fed's dual mandate from Congress calls on it to balance theobjectives of stable prices and maximum employment. Brady hasdrafted legislation that would limit the Fed's purchases toTreasury securities and remove full employment from their mandate,among other measures. He says the bill has about 40co-sponsors.

Republican presidential candidate Mitt Romney said the Fed'sdecision reflected what he described as President Barack Obama'sfailure to revive the economy. He repeated his calls to replaceBernanke when the chairman's term expires in January 2014.

“The president's saying the economy's making progress, comingback,” Romney said in an interview with ABC News. “Bernanke'ssaying, 'No, it's not. I've got to print more money.” He added that“Printing more money, at this point, comes at a higher cost thanthe benefit it's going to create.”

Bernanke said at the press conference that the Fed doesn't takepolitics into account when making policy decisions, and that hedoesn't “have any decision or any information” on a possible thirdterm. Obama, who reappointed Bernanke in 2010, hasn't said whetherhe would ask him to stay.

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 58-year-old former Princeton University professor has keptinterest rates near zero since December 2008 and expanded the Fed'sbalance sheet to a record of almost $3 trillion with large-scaleasset purchases.

The second round, announced in November 2010 and dubbed QE2,unleashed the harshest political criticism of the U.S. central bankin three decades, with Republicans warning the measure riskedinflation and weakening the U.S. dollar.

Hasn't Materialized

Surging inflation hasn't materialized. Since then, the personalconsumption expenditures price index has climbed at an average rateof about 2.2 percent, close to the Fed's target of 2 percent. Theindex rose 1.3 percent in July from a year earlier.

“With the huge slack in the economy that now seems to prevail,inflation will likely remain quiet for some time,” said NathanSheets, global head of international economics at Citigroup Inc. inNew York who was director of the Fed's international financedivision until last year. “This gives them scope to be veryaggressive in pursuing the employment leg of their mandate, wherethey are missing by a wide margin.”

Policy makers yesterday forecast unemployment of 7.6 percent to7.9 percent at the end of next year, and 6.7 percent to 7.3 percentin 2014. Inflation will be from 1.6 percent to 2 percent in thenext two years, according to the central tendency among Fedofficials, which excludes the three highest and lowest of 19estimates.

The U.S. economy remains vulnerable to the so-called fiscalcliff, the $600 billion of tax increases and spending cuts thatwill kick in automatically at the end of the year unless Congressacts, Bernanke said. Europe's sovereign debt crisis may also weighon growth, he said.

While monetary policy isn't a “panacea,” the latest stimulussteps will help boost the economy, Bernanke said.

“They're pushing on the string as far as they can because theyrealize they're the only game in town,” said Michael Strauss, whohelps manage $26 billion as chief economist and chief investmentstrategist at Commonfund in Wilton, Connecticut. “They'll takerisks on the inflation side” as “the Fed knows how to fightinflation.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.