FED announces unlimited QE

Silver Bear Cafe
www.silverbearcafe.com
September 14th, 2012
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by Joe Weisenthal

The Federal Reserve decision is out, and it’s a biggie.

There are two main components.

The first is that the Federal Reserve has extended its guidance for low rates through 2015.

The second is that there’s going to be open ended quantitative easing.

The Federal Reserve will buy $40 billion worth of Mortgage Backed Securities without end.

Whereas in the past the Fed always announced a specific amount of QE, this time there will be no stop until the Fed is happy with the pace of recovery.

Here are the key paragraphs from today’s Fed announcement…

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.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

The Fed just changed the game.

Whereas in the past, the Fed always set a defined amount of Fed purchases, this time they’re saying that the easing will continue until morale improves.

This is a major change.

They’ve now said to businesses and banks and everyone else that they will not let up and tighten conditions until things are much better.

If you haven’t been paying attention, this is a move towards the hot new idea in monetary policy ideas.

In his paper, economist Michael Woodford wrote all about the power of pre-commitment, and its ability to shape expectations.

Furthermore, we should add that not only is this QE, the Fed is also talking about “other policy tools” that could be used.

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

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.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.

This is it folks: The most anticipated Fed decision of the entire year.

At 12:30, the Federal Open Market Committee will decide whether the weak economy warrants an additional round of asset purchases (QEIII), or whether it will decide to wait until further information comes in.

It may, for example, merely decide to extend its low rates guidance.

Or it could do some combination of a bunch of different things.

Meanwhile, markets are a touch higher, but gold, oil and the euro just fell sharply, perhaps indicating some kind of last-second fear that there won’t be QE.

(Editor’s Note: The following charts reflect the metals’ market reaction to Bernanke’s announcement. The screen shots were taken at 12:30PM CDT. Fasten your seat belts, this is going to be a bumpy ride”. – JSB)