QE4 Here: Bernanke and Federal Reserve Quadruples Down On Quantitative Easing
On Wednesday the Federal Open Market Committee of the Federal Reserve announced that will enact a fourth round of quantitative easing QE in attempt to accelerate a sluggish recovery. In the statement, the Fed announced that it will purchase $45 billion in long-term Treasury bonds in addition to the $40 billion in monthly purchases of mortgage-backed securities from financial institutions. This is the last month of the Fed's Operation Twist, in which the central bank swapped short-term government debt in exchange for long-term Treasurys.
In addition, the FOMC statement said that the Fed would adopt economic thresholds for policy tightening. For the foreseeable future, rates are slated to stay exceptionally low as long as the unemployment rate remains above 6.5%, and as long as inflation remains at 2.5% or less.
The announcement did not come as a surprise as, most economists predicted the Fed would take action today. This is fourth round of QE the Fed has implemented since the 2008 financial crisis. During QE1 and QE2, the Fed purchased a combined $2.3 trillion in toxic mortgage-backed securities and Treasurys from imperiled financial institutions that had bet big on mortgage derivatives backed in large part by subprime loans. In September, the Fed announced more easing through the purchasing of $40 billion per month in mortgage bonds. QE4 pushes the Fed's monthly asset purchases up to $85 billion.
Today's announcement will undoubtedly give the Fed's critics more ammunition. Despite heavy market intervention by the Fed, the economic recovery has been very slow, and unemployment is at 7.7%. Multiple rounds of QE have produced diminishing returns. Although the goal is to drive down interest rates and spur lending by infusing financial institutions with money in exchange for securities, corporations are sitting on more cash than ever before. Of course, the looming December 31 fiscal cliff deadline has done nothing to encourage companies, including banks, to do otherwise. Indeed, in his Wednesday press conference, Bernanke said that if the country goes over the fiscal cliff — a term he coined — the Fed does not have the tools to pull the country back.
Full Federal Open Market Committee statement:
Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient 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 will run at or below its 2 percent objective.
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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee 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 and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain 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 Treasury and agency mortgage-backed securities, 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.
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 asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
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 the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.