The Federal Reserve on Thursday, in an effort to target stubbornly high unemployment, offered an array of open-ended stimulus programs designed to keep interest rates low until an economic recovery gains significant traction.

In a strategy shift, the Fed’s latest round of quantitative easing, commonly referred to as QE III, will target mortgage backed securities rather than U.S. Treasuries. And, importantly, the Fed said it plans to keep interest rates low even after a recovery gains momentum.

The Fed statement said it “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

Federal Reserve Chairman Ben Bernanke hinted recently that Fed policy could soon be tied directly to the U.S. labor markets. Without setting specific targets, the Fed’s announcement did just that.

[....] Fed: Housing Market Is Key Recovery

 The new Fed policy suggests that a housing market recovery is key to stimulating labor markets and eventually spurring a full-fledged recovery, Faucher explained. By keeping mortgage rates low -- and possibly pushing them even lower -- through Fed purchases it will hopefully give the fledgling housing recovery some much-needed momentum, he said.

[....] Bernanke, clearly aware of the political ramifications of Fed policy with a presidential election looming, also took pains to explain that asset purchases do not equate to government spending.

The Fed announced a program of mortgage backed securities purchases valued at $40 billion each month. The Fed also said it would extend Operation Twist, a program initiated a year ago designed to shift the central bank’s portfolio toward long-term assets.

“These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative,” the Fed statement said.

In addition, as had been widely predicted, the Fed said historically low interest rates will remain in place through at least mid-2015. Interest rates have been set at a range of 0%-0.25% since December of 2008, during the worst of the recent financial crisis.

 [....] Critics of the Fed’s long-term low interest rate policy note that the strategy hurts anyone -- notably retirees -- who has invested in fixed income securities such as bonds. Investment returns on bonds are derived through the bond’s coupon which fluctuates with interest rates. Higher interest rates mean higher coupons, which translate into better returns for investors.

Savings accounts have also been all but useless as a means of deriving income as interest rates have hovered near zero for almost four years.   

However, the Federal Reserve hopes that keeping pressure on short and long-term rates will create a multiplier effect. Low rates could encourage businesses to borrow and make investments across the economy. Mortgage rates may also fall, helping to make home purchases more attractive and adding to the burgeoning recovery in that sector.

[....] The Fed chief stressed repeatedly during his press conference that central bank policy alone is not enough to cure high unemployment or ward off a potential recession if the U.S. falls off the so-called fiscal cliff early next year, when dramatic budget cuts and tax increases will occur unless Congress reaches a compromise on government spending and deficit reduction.