Wednesday, December 12, 2012

FOMC Statement: QE4ever Until Jobless Rate Falls to 6.5%
Today’s FOMC statement announced today that the Fed will buy $45 billion a month in long-term US Treasuries starting January with no limit on the total amount and no termination date. That adds up to $540 billion a year, though Fed Chairman Ben Bernanke said the latest version of QE would be “flexible.” The coupon income earned on those securities is sent back to the Treasury, less the 0.25% that the Fed will pay banks for the reserves they will accumulate as a result of this latest expansion of the Fed’s balance sheet.

Of course, that’s in addition to the $40 billion on mortgage-backed securities per month that the Fed committed to start buying back at the September 12-13 meeting of the FOMC under QE3. The latest program--let’s call it "QE4"--replaces Operation Twist, which expires at the end of this year. Under that program, the Fed swapped about $45 billion in short-term Treasuries for long-term Treasuries.

The FOMC statement, which was probably the longest on record, committed the Fed to keeping the federal funds rate near zero until the unemployment rate falls below 6.5%. Of course, tying the federal funds rate to the jobless rate wasn’t a surprise since the Fed now tends to leak its policy plans several weeks before they are implemented. FOMC meetings are now part of an ongoing (i.e., seemingly never-ending) and open forum discussing the next iteration of QE. Transparency is a wonderful idea, but it may be too much of a good thing, in my opinion. That’s because it perpetuates the myth that monetary policy is all-powerful and monetary policymakers are all-knowing.

Can monetary policy and its administrators really fix all of our problems by buying so much of our debts in such an open-ended fashion? I have my doubts. Apparently, Fed officials don’t have any doubts at all since they never even ask the question, with the exception of a couple of the usual dissenters on the FOMC. However, Mr. Bernanke did admit today that the “Fed's ability to ease further isn't unlimited.” He should have said that it is actually very limited.
(Based on an excerpt from YRI Morning Briefing)

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