Fed announces additional monetary stimulus

Chip Somodevilla/Getty Images

(MoneyWatch) The Federal Reserve's announcement today that is launching a third round of quantitative easing validated widely held expectations that the central bank would provide more monetary stimulus in an effort to speed the economic recovery.

The Fed said it will purchase $40 billion a month in mortgage-backed securities and extended its guidance on interest rates. Rates will stay low through mid 2015 instead of 2014, the bank said. The additional Fed easing, along with its intention to continue reinvesting the proceeds from principal payments from its holdings of financial assets, will increase its inventory of securities by approximately $85 billion each month through the end of the year. These actions, which are more aggressive than many analysts expected, "should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," according to a Fed statement.

The Fed's decision to provide further accommodation breaks the gridlock within the Fed's monetary policy committee resulting from disagreement about the costs and benefits of further action. One faction has argued that structural impediments in the economy limit the ability of the Fed to stimulate employment. This group believes the main consequence of further easing will be inflation, and hence the costs of further easing are larger than the benefits. In fact, some within this group would prefer to reverse existing policy. The other faction believes the inflation fears are overblown, and there is plenty the Fed can and should do to help with the unemployment problem.

Fed to spend $40B a month on bond purchases
How does "quantitative easing" work?
Full text of the Federal Reserve's statement

There are also several centrist members who believe the potential for inflation and the benefit of further action are fairly close, and until now the scale had tipped against further action.

Several things changed their minds. First, the main driving force behind the policy change was the recent Labor Department report showing that the labor market continues to stagnate. But a second factor was also important. At the recent annual Federal Reserve conference in Jackson Hole, Wyoming, the former chairman of George Bush's Council of Economic Advisers, Ed Lazear of Stanford University, presented evidence that the unemployment problem is not structural, as many who object to more stimulus contend. This likely led some members of the Fed to reevaluate the benefits of further easing, and tipped the scale in the other direction. Finally, recent data has not justified the worries about inflation. In fact, many measures show inflation running below the Fed's target level.

The policy the Fed announced today is unusual in that it is an open-ended purchase of securities. The Fed did not announce a total dollar value as it has in the past, but instead committed to continue buying assets until economic conditions change. That means it will continue the securities purchases until unemployment falls "substantially" or inflation begins to increase to worrisome levels.

The extension of the forward guidance on interest rates to 2015 is also unusual, but both of these can also be explained by the recent conference in Jackson Hole. At that conference, Michael Woodford, a highly respected monetary economist, delivered a paper showing that the Fed has the most impact on the economy when it credibly commits to future actions. Thus, according to Woodford, it is not the quantitative easing itself that helps the economy (i.e. how many assets the Fed holds), but rather the commitment to continue purchasing assets until the unemployment rate improves substantially that matters. This is a form of forward guidance, and it complements the forward guidance on interest rates that the Fed has issued in the past and extended today.

Even with the policy commitments issued today and the actual actions the Fed will take, there is some question about how effective the Fed will be at stimulating the economy. The policies work mainly through lowering long-term interest rates and elevating stock market values. But there is not much room for long-term interest rates to fall, and the stimulative effects of higher stock values aren't that large. In addition, some analysts worry that this will make it far less likely that Congress will initiate tax cuts, additional spending, or direct job-creation measures, though political gridlock likely eliminates that possibility in any case.

Not everyone, however, agrees that the Fed is relatively powerless, and with fiscal policy off the table, inflation worries very low and the unemployment problem very large, the Fed decided that more action was justified. It may not be able to completely fix our economic problems, but it does believe it can help.

[mojenawilleam]

Reverse mortgages are designed as financial assistance for people 62 years or older. The reverse mortgage works by allowing the homeowner access to the equity in their home without the issues of a monthly payment for the available funds.

http://www.reversemortgagelendersdirect.com/reverse-mortgage-calculator/
http://www.reversemortgagelendersdirect.com/reverse-mortgage-rates/
http://www.reversemortgagelendersdirect.com/reverse-mortgage-information/

[unclebernies]

The Federal reserve acts indepently of politics so their decision was based on keeping the economy going forward. They said clearly that congress needed to act and they haven't .

[Jaylah54200]

by aintfakin September 13, 2012 9:39 PM EDT

you dont earn any interest and you dont pay any either.

________________________

Well, it's true that interest rates are very low for some things. Like for people still in good enough shape to get a mortgage on a home that's still selling for almost-rock bottom prices still.

But for all but those with the highest credit scores, credit cards are still around 25%. Which is not exactly what I'd call "not paying any interest." True, those in a financial position to pay off their balances every month are not paying interest, but far too many people don't do that.

[joule18]

Obama to Fed: "I'm in trouble. HELP!"

[askagain]

Exactly. It is an election year and Obama faces the posibilty of losing the election. The timing is very suspicious.

[unclebernies]

I have a great idea. Let's give money to the wealthy because they will trickle down the wealth to everyone else. Yeah right. Truth is if you don't learn from your mistakes your destined to repeat them. Or also called stuck on stupid.

[Jhihmoac]

When in doubt, throw more money at the problem...Here comes the "gold rush" again - SHEESH!

[Ulgnud]

Why? Because Obama wants an uptick in the economy to help re-elect him. What happens after that is not important.

[aintfakin]

why isnt it important to you?

[marcie10000]

Are there any of us left from Nixon/Ford/Carter price controls? You can't have a war(s) and pay for bread and butter at the same time. I guess QE3 is to damper the inflation.....

[taxed01]

Obama and the Democrats are following policies that hurt senior citizens. Those of us responsible enough to prepare for retirement are getting screwed:
1 He wants to reduce the amount of money going into Social Security by cutting the payroll tax. There would be some smoke and mirrors going on to make it look like there would still be the same amount of money going to the SS account, but that's all it is - smoke and mirrors.
2 Getting nothing (no interest) on our short term savings, CDs and money market accounts.
3 Seeing half a Trillion being removed from Medicare to pay for the uninsured (from cuts in payments to essentially every Medicare provider — hospitals, hospices, nurses, etc. - this will have to be made up elsewhere).
4 He wants to tax us more when we sell some stock or mutual funds that we bought years ago for our retirement.
5 The interest sensitive parts of pension funds are taking huge hits because of the low long term interest rates being introduced.
Obama and the Democrats have declared war on responsible seniors so they can continue to give handouts to the welfare crowd.

[aintfakin]

this is rich
we get a tax break and a right winger complains. the right wing hypoicrisy never ends
you dont earn any interest and you dont pay any either. For a further point on interest rates see your felloow right winger's post on the fed below. which way is it you birdbrain
keep circulating the lie about medicare. Nothing will be taken away from benefits...it will all be gained from eliminating overcharge which is tantamount to fraud on the supplier's side. But dont let a good idea get by because it wasnt from the right. this is the same thing the republicans wanted earlier but now the hypocrites oppose it because Obama likes it too.
the only folks he wants to tax more on stock eetc aare those making over 250,000 a year . is that you poor baby?
and when did right wingers start caring about pension funds. Thats union blasphemy. The hypocrisy never ends on the right

[lami987]

1. Cutting payroll tax is the only correct way to cut tax on working people. That would create jobs by creating sales. Jobs are created when consumers buy. So far income tax cuts generally go to more well to do Americans. $100 earned by a low or middle income American create more jobs than $100 earned by a wealthy American because wealthy American spends some of the money out of the country.
2. You are 100% correct there.
3. Obama's cut from Medicare does not cut Medicare recipient's benefit. He cuts payments to insurance companies, pharmaceutical companies by allowing drug price negotiations, hospitals etc. Ryan's cut to Medicare does indeed cut benefits of Medicare recipients.
4. Obama doesn't want to tax us more unless we are making more than $200,000(individual) or $250,000(family).
5. Pension one gets is generally fixed and does not depend on interest rate. Any senior who has a 401K account is doing extremely well because market has advanced far ahead of its peak before the recession.
Obama and the Democrats are not making war to responsible seniors. They are actually declaring war on welfare crowds like big business and wealthy Americans who not only get huge tax breaks but also pay no tax or almost no tax regardless of how much profit they make. Welfare to the needy and poor will likely continues but that amounts to only a small fraction of what's given to big business and the wealthy.

[aintfakin]

holysht
we cant have economy improving
not before the election
we have made the middle class suffer this long
surely they can suffer a few more months until we can get rid of Obama
good luck with that you right wing pigs

[aintfakin]

the stock market obviously doesnt agree with either of you geniuses

[nojoy01]

If the Fed really wants to "directly stimulate" the economy, I've got a suggestion. Just cut a check to everybody who filed a tax return last year,& made less than 3 times median income, for 100,000 $$, tax free. Inflationary? Can't be any more inflationary than pumping a Trillion + $$ hot off the printing presses into the economy every year to cover the deficit. The smartest ones will pay down/off debt & everyone will have money to spend. People spending money creates demand. Demand creates production. In order to produce companies will have to hire to meet the increased demand for products & services. More people working means more tax $$ collected & less tax $$ spent on long-term unemployment benefits and "safety nets". A win-win situation and the real bonus for me is that I could pay off all of my debts & still have most of it left. :) So, let's get the Fed in gear & cutting those checks.

And for those of you who wish to take me to task for "not understanding economics" this suggestion is no sillier & has a lot more potential for success than many that have come out of D.C.

[joule18]

This idea of your is a lot more sound than creating jobs at a cost of several hundred million dollars each.