Moving to bolster the recovery, the Federal Reserve on Thursday agreed to buy $40 billion a month in mortgage-backed securities to cut borrowing costs for home buyers and other borrowers, and pledged to keep short-term rates near zero until at least mid-2015.

Markets reacted enthusiastically although an initial spike of nearly 1% in major indexes began to lose steam shortly after the Fed's announcement. By 1 p.m. ET, the rally regained power with major indexes trading close to levels not seen in nearly five years.

It's the first time since the Fed's bond purchases began in 2008 that it has made an open-ended plan to buy government securities.

Economists say it represents a more powerful commitment to pump money into the economy until job growth picks upsignificantly.
Lower long-term rates cut borrowing costs for consumers and businesses, theoretically stimulating the purchase of homes, cars and factory equipment.

The Fed in January pledged to keep interest rates near zero until at least late 2014 but extended the commitment Thursday because of the weak economy.

Many economists have been predicting for weeks that the Fed would move Thursday to re-energize a three-year-old recovery that has shown recent signs of flagging. Stock markets have risen sharply in anticipation of the move.

Job growth, though steady since early 2010, is still weak. The economy gained 96,000 jobs last month, far less than in July. The unemployment rate, at 8.1%, is a percentage point lower than a year ago but has stayed stubbornly above 8% for 3 1/2 years. Other recent data have shown exports falling, manufacturing weakening, and consumer confidence declining.

With a divided Congress taking no significant steps to stimulate growth, the Fed's easy-money policies are seen by many as the sole antidote for an ailing economy, even if its benefits are limited.

The Fed has spent $2.3 trillion since late 2008 buying Treasury and government-backed mortgage bonds in an effort to push down longer-term interest rates that consumers and businesses pay to borrow, and to steer investors from bonds into stocks.

The central bank took the unprecedented action because it had done all it could through conventional methods, including holding a key short-term interest rate near zero since 2008. Stock prices have gotten a lift in anticipation of each new round of the Fed's stimulus actions, known as a "quantitative easing."

Higher stocks increase household wealth and prompt consumers to spend more, but the Fed's two previous rounds of quantitative easings haven't been enough to put the recovery on a solid growth path. The Fed's efforts have faced strong headwinds, such as the European debt crisis and battles in Congress over the federal debt.

Each successive easing has had less impact than the one before it, and Fed Chair Ben Bernanke has acknowledged that the benefits of stimulus have diminished and risks, such as eventual inflation, have increased.

Fed officials say political considerations do not enter into their decisions, but intervening in the economy now -- in the final weeks of a heated presidential campaign -- would go against longstanding convention and could make the Fed a target for criticism.

In an Aug. 23 interview with Fox News, GOP candidate Mitt Romney criticized the Fed's second QE round as ineffective and said a QE3 is "the wrong way to go." In keeping with longstanding tradition, President Obama has not specifically commented on the Federal Reserve.