<strong>WATCH: What 'Unlimited QE' Means</strong>
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 labour 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.
This is a very big change.
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