Fed links rates to US unemployment The US Federal Reserve will keep interest rates at close to zero until unemployment falls below 6.5 per cent in a historic change to monetary policy. It is the first time a large central bank has ever tied its interest rate policy directly to the state of the economy. The Fed said it will continue to forecast low rates provided its inflation expectations do not rise above 2.5 per cent. Mr Bernanke said at a news conference that the numerical thresholds for low rates would help "support household and business confidence and spending" and noted that this would make monetary policy "more transparent and predictable" to the public. But Mr Bernanke said the 6.5 per cent threshold on unemployment should not be interpreted as the Fed's long-term natural jobless rate goal, which was significantly lower. The Fed also beefed up its third round of quantitative easing to $85bn a month - adding $45bn of Treasury purchases to its commitment to buy $40bn of mortgage-backed securities each month - and said it will keep buying until there is a substantial improvement in the labour market. The changes mark an all-out effort to revive the stuttering economic recovery. They also signal that the central bank remains concerned about the "fiscal cliff" of tax rises and spending cuts that could be triggered next month, and has taken little heart from improved data on the housing market. Mr Bernanke said that the economy was already incurring "costs" from the threat posed by the looming fiscal cliff. Mr Bernanke reiterated how damaging it could be for to the US recovery - and said the Fed did not have the tools to offset its full impact, but could potentially increase the size of its asset purchases "a bit." The dollar came under renewed pressure and government bond prices eased after the new Treasury purchases were announced. Initially, US equities rose to new session highs on the news before retreating by the time Mr Bernanke gave his press briefing . By mid-afternoon in New York, the S&P 500 was 0.03 per cent lower. The yield on 10-year notes rose to 1.70 per cent, up 5 basis points. The dollar was 0.2 per cent lower on a trade weighted basis. Spot gold in New York rose $1 an ounce to $1,711. With the unemployment rate at 7.7 per cent in November, the move signals low interest rates for the foreseeable future, and it replaces the Fed's earlier pledge of low rates "at least through mid-2015." According to a statement by the rate-setting Federal Open Market Committee, which voted for the move by 11 to 1, "The committee views these thresholds as consistent with its earlier date-based guidance." At the meeting, Fed officials updated their economic projections. They are now forecasting growth of 1.7 per cent to 1.8 per cent this year and between 2.3 per cent and 3 per cent next year. This is slightly slower than they expected in September. However, their projections for unemployment were slightly rosier than they were two months ago. The Fed is forecasting unemployment between 7.8 per cent and 7.9 per cent in the current quarter, dropping to between 7.4 per cent and 7.7 per cent in the last quarter of 2013. The Fed is also expecting core inflation to remain between 1.6 per cent and 1.9 per cent next year, well below the 2.5 per cent threshold it announced for low interest rates on Wednesday. The goal of the new economic conditions is to offer reassurance that rates will remain low for as long as the economy remains weak. If the economy deteriorates, then markets will automatically expect rates to stay lower for longer, because the unemployment and inflation conditions will not be triggered. The Fed gave itself a get out clause in case that happens. It said that it will also monitor "additional measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments." Under Twist, the Fed sold bonds close to maturity, and bought those with longer to run; now it will just create bank reserves to finance new purchases. The goal of both programmes is to reduce the supply of long-term assets such as Treasury bonds, driving down interest rates on mortgages and other loans, and thus speeding up economic growth.