The Federal reserve voted to begin a third major asset purchase program at their September meeting.
Under the new plan, the Fed will create reserves to purchase 40bn of MBS each month – until ‘the outlook for the labour market improves substantially’. The IOER rate was left at 25bps, and the low rate pledge was moved out from ‘late-2014’ to ‘mid-2015’. There was no new UST buying announced, though the Fed will complete ‘twist2’ as announced.
This means 85bn per month of buying — 45bn per month of long end buying due to twist2, and 40bn per month of balance sheet expansion via MBS purchases. This program is more potent than QE2, as it involves the Fed taking more ‘risk’ – as it is purchasing MBS.
Even with this additional easing, the vast majority of Governors do not expect the fed’s policy rate to rise until 2015. To better demonstrate their reaction function, the statement added:
the committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens
This is the most ‘Woodfordian’ part of the new policy – the FOMC is trying to make plain that they will not be tightening until the recovery is well advanced.
I am becoming more pessimistic myself, but the company is getting scarce – only one voter still expects the policy rate to be unchanged by the end of 2015. What is more interesting (and unrealistic to me) is that the median of voter appear to believe that the neutral policy rate in the long run is ~4%. I would guess that this is a ‘golden rule’ type 2% + 2% argument.
Perhaps, over the very long run this will hold once again, however over the next decade or so, I think it likely that the US economy would feel the pinch if they got much above 2%
To my eye, their forecasts still look too optimistic on growth and the unemployment rate – but i guess it is hard to be sure how long this policy is going to run for – or indeed if any of the individual forecasts assume more QE!
Remember that each forecast is made assuming ‘appropriate monetary policy’, and that statement is broad enough to cover a multitude of sins…