The Federal Reserve will once again pump money into the economy in another iteration of its unconventional quantitative easing policy, the nation's central bank reported today. And in an even more unconventional move, the Fed left its commitment to the policy open ended.
A statement released by the Federal Open Market Committee at the conclusion of its latest meeting says that the nation's central bank will purchase $40 billion a month in mortgage-backed securities, with no stated end date to the purchases.
In addition, the Fed said that it foresees maintaining "exceptionally low" interest rates at least through mid-2015, instead of late 2014, as it had previously stated. The FOMC, which oversees the Fed's buying and selling of securities, is taking the actions due to worries over a sluggish recovery.
"The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," said the statement announcing the new policy. The goal of the purchases, according to the committee's statement, is to "put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
More easing was widely anticipated today, but the announcement of an open-ended third round of easing, or QE3, throws a twist into the already-controversial policy.
Though the FOMC gave no solid indication of when its monthly purchases might end, instead tying its timeline to a shaky job market. If the jobs situation does not improve sufficiently, the FOMC will continue to buy mortgage-backed securities and other assets, as well as employing other policies, "until such improvement is achieved in a context of price stability," said the statement.
The question is how much improvement will be enough to end the easing. While that remains unclear, Federal Reserve Chairman Ben Bernanke gave some guidance at a Thursday press conference, telling reporters that the Fed will not buy securities until the economy reaches full employment.
“That’s not the objective,” he said, noting that such an approach would be unsustainable.
A central intention of quantitative easing is to give banks more assets, with the goal of inspiring them to loan out the money and spur more economic growth. In addition, the purchases of mortgage-backed securities are designed to push exceptionally low mortgage rates even lower, which could potentially boost a flagging housing market. While housing has in the past been a boon to economic recoveries, it has been slow to recover from the financial crisis, dragging on the broader recovery.
"My guess is right now they thought at this point, they had to do something. By directing it more toward the mortgage portfolio, they're doing almost fiscal policy." says Doug Roberts, managing principal at Channel Capital Research of the purchases targeted at the housing market.
The move might serve to speed the recovery when fiscal policy moves don't appear forthcoming, he adds, pointing out that "Congress can't seem to get their act together with the administration."
Still, Bernanke insisted on Thursday that easing is no substitute for fiscal policy.
“Monetary policy, as I’ve said many times, is not a panacea. It’s not by itself able to solve these problems,” he said. “We’re looking for policymakers in other areas to do their part.”
The fear with any new instance of "printing money," as some call the Fed's massive asset buys, is that it will spur inflation. However, the committee did not seem overly concerned with inflation in its statement, saying that it "anticipates that inflation over the medium term likely would run at or below its 2 percent objective."
The tension between high jobless rates and inflation worries is a key one for the Fed, which has a dual mandate of maintaining price stability and maximum employment. In Roberts's opinion, Federal Reserve Chair Ben Bernanke seems to be more concerned with boosting the labor market.
UPDATED 9/13/12: This story was updated to include quotes from Federal Reserve Chairman Ben Bernanke’s Thursday press conference. CORRECTED 9/13/12: The initial version of this story misstated the Fed’s guidance on low interest rates. The Fed says it believes the federal funds rate is likely to be exceptionally low through mid-2015. This version also corrects a quote from Doug Roberts.