Fed Watch

The Federal Open Market Committee concluded its meeting Thursday September 13 by doubling down on Quantitative Easing.

The FOMC statement includes the following.

The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. 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 . . .

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. ¹

1. FOMC policy statement http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm

This significant expansion of quantitative easing with new purchases of mortgage-backed securities and the continuation of operation twist with purchases of long term securities as short term securities mature is an unprecedented step by the fed to stimulate the economy. It will undoubtedly be criticized by those who believe that continued purchases of securities will have little impact on production and employment, while threatening future inflation. It will also receive criticism as inappropriate in the election cycle. But, Chair Bernanke seems committed to continuation of this aggressive monetary policy, especially in light of the complete inability of the Federal Government to conduct spending and tax changes to stimulate the economy.

I am confident the Fed is not conducting policy to impact the election results. The research on this topic is convincing. The Fed protects its independent status by avoiding any partisan policy decisions.

 
Will it work? That is a much more difficult question to answer as it requires an assumption of what would have happened without the quantitative easing. The research indicates that there is an impact of monetary policy on production and employment, but that impact is not permanent. It seems Chair Bernanke is signaling that the Fed believes any impact is worth the risk.