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As the Fed decision draws near, we’re doing an overview of the various moves the Fed might make to stimulate the economy.We already explained the possibility of unlimited Quantitative Easing, meaning that the Fed would commit to buy bonds open-endedly until the economy improved.
Here’s another possibility that’s being buzzed about this morning.
Instead of easing policy through purchases, the Fed would ease policy via its language: Verbal Easing.
What this means, essentially, is that the Fed would indicate low rates for an even longer time than they’ve currently stating. Currently the Fed suggests low rates through 2014. The assumption is that the Fed would say they’re on hold, probably, until 2015.
This might seem pointless, but there’s a theory that that could be even more powerful than bond buying, because it could lower long-term rates even further, and commit to businesses that they don’t have to worry about higher rates for a longtime.
In fact, the power of language is essentially at the core of the recent Michael Woodford paper that was the buzz of Jackson Hole.
Verbal Easing allows the Fed to do something, while also waiting to see if things improve until after the election (when any decision will be less politically fraught). With Europe seemingly improving, the Fed may want just a couple more months to see what’s going on in the real word before it commits to new asset purchases.
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