[Economy] Federal Reserve announces new round of quantitative easing

[DrClapeyron]

The Federal Reserve announced an indefinite $40 billion per month round of quantitative easing. This new phase of easing will combat a weakening economy, strengthen confidence in the financial system and assure that the central bank's mandates on unemployment/housing are met.

Fed Undertakes QE3 With $40 Billion Monthly MBS Purchases

The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

“We’re looking for ongoing, sustained improvement in the labor market,” Chairman Ben S. Bernanke said in his press conference today in Washington following the conclusion of a two-day meeting of the Federal Open Market Committee. “There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.”

...

The Standard & Poor’s 500 Index jumped 1.6 percent to 1,459.99 at the close of trading in New York. Oil climbed 1.3 percent to $98.31 a barrel, a four-month high, while gold jumped to the highest price since February.

...

While the U.S. has “enjoyed broad price stability” since the mid-1990s, Bernanke said, “the weak job market should concern every American.”

Bernanke said the open-ended purchases of securities should help bolster the confidence of American consumers and businesses by showing that the central bank is determined to stop the economy from weakening.


http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html

http://www.bloomberg.com/video/u-s-economy-is-in-a-recession-achuthan-says-ey7VB61IT_C~3e4bp4YO_w.html No kidding. According to the recently released unemployment survey there was a -119,000 change in employed persons to go along with an addition of 581,000 people not in the labor force.

Not sure I see the logic this time around. The Fed wants to keep interest rates low to encourage an underemployed workforce with little savings in a stagnant economy to purchase houses. http://echoboombomb.blogspot.com/p/who-are-echo-boomers.htmlare delaying marriage, delaying having children, moving back with parents, have very little savings, and are saddled with loads of student debt in an economy where they see poor career prospects.

And the Fed wants to purchase MBS from the large banks? Hmmm...

Monetary policy is good for keeping confidence in the financial system and preventing panicks - Friedman philosophy. I don't think it is entirely up to the central banks to command the economy to grow in such a manner. However, if any central authority is going to command the economy to grow faster it will be the national government (fiscal policy) - Keynesian philosophy.

 

[SixNein]

Not sure I see the logic this time around.

Just take a look around. Europe is melting down, china is slowing, and our foreign policy in the middle east is simply going down the toilet. I think the fed is trying to put up some hedge against all of this.

 

[phyzguy]

Monetary policy is good for keeping confidence in the financial system and preventing panicks - Friedman philosophy. I don't think it is entirely up to the central banks to command the economy to grow in such a manner. However, if any central authority is going to command the economy to grow faster it will be the national government (fiscal policy) - Keynesian philosophy.

If you read what Bernanke has been saying, I think the Fed would agree with you that fiscal policy would be a much better tool than monetary policy to combat the weak demand that is the cause of our current economic weakness. However, it is clear that no fiscal stimulus is forthcoming, since the US Congress is deadlocked by the upcoming elections and the ideological stance of the current Republicans, who are opposed to any sort of government intervention. So I think the Fed feels they might as well use the tools they have, however ill-suited they are to the task.

 

[Czcibor]

Not sure I see the logic this time around. The Fed wants to keep interest rates low to encourage an underemployed workforce with little savings in a stagnant economy to purchase houses. http://echoboombomb.blogspot.com/p/who-are-echo-boomers.htmlare delaying marriage, delaying having children, moving back with parents, have very little savings, and are saddled with loads of student debt in an economy where they see poor career prospects.

The idea is that there is an output gap, and that US central bank is free to flood market with extra cash. So long as there are no significant inflation impulse this idea in general sounds reasonable.

The problem is that to take loan you have be a credible person. Actually, when during crisis banks become more careful that keep quite many people out of loans. Further attempts to lower interest rates aren't going to be specially effective, because banks should find those who are credible, were not seriously indebted in past but now got tempted by so low interest rates.

Monetary policy is good for keeping confidence in the financial system and preventing panicks - Friedman philosophy. I don't think it is entirely up to the central banks to command the economy to grow in such a manner. However, if any central authority is going to command the economy to grow faster it will be the national government (fiscal policy) - Keynesian philosophy.

Capitalistic economy tend to fluctuate. As long as that not something that everyone has to accept and endure (like harsh winter), then there should be a central institution able to manage that problem. Directly electable officials have this disadvantage that they might use granted to them policy tools just to be reelected and artificially inflate economy half year before the voting. Unelected people in a central bank have this advantage that they might have different incentive structures. (with potential punishment of being blasted in peer reviewed articles ;) )

I'm not saying that this tool is specially effective, but there are not many accepted tools at disposal left for central bank. (presumably fiscal policy would be more effective, however, I'm not very convinced about political feasibility of idea in any country "now gov goes on spending spree but tomorrow when economy expands and first inflationary symptoms are visible we're going to run budget surpluses")

Concerning Europe - we still haven't fully used (so far there was only promise) monetary tools that are technically accessible for ECB and directly buy big stacks of bonds of Mediterranean govs.

However, it is clear that no fiscal stimulus is forthcoming, since the US Congress is deadlocked by the upcoming elections and the ideological stance of the current Republicans, who are opposed to any sort of government intervention. So I think the Fed feels they might as well use the tools they have, however ill-suited they are to the task.

I find funny that Republicans have now very similar stances like Germans have. Except only Germans have the luxury that pain of contracting economies is mostly felt somewhere else, so they might show proud and pure ideological stances effectively for free.

 

[Galteeth]

Isn't this just the same thing over and over again? While the stock market may get a temporary boost, I don't see much evidence that the Fed's recent actions has had the intended "trickle down" effect.
Is it possible all this easing is really intended to weaken the dollar so as to make it easier to pay the ever growing deficit?

 

[JonDE]

Isn't this just the same thing over and over again? While the stock market may get a temporary boost, I don't see much evidence that the Fed's recent actions has had the intended "trickle down" effect.
Is it possible all this easing is really intended to weaken the dollar so as to make it easier to pay the ever growing deficit?

Interesting hypothesis, I guess I could see how weakening the dollar could help the deficit, but I'm not really sure it would. I think foreign investors would be less likely to invest in American bonds, if they felt the bonds were losing value.

More likely, if they are really trying to weaken the dollar, it is because it would make it easier to increase exports, which should increase our manufacturing base. Weakening the dollar makes goods from other countries more expensive, and goods from our own country cheaper to other countries. Even more directly, one of the immediate side effects of quantitive easing is that it tends to push more money into commodoty speculation, normally raising prices. i.e. if the price of copper goes up 10% it creates a lot of incentive for companies to go out there and mine copper.

 

[jduster]

because rounds 1 and 2 worked sooo well...

 

[DrClapeyron]

I should note that mortgage delinquency and foreclosure rates have not changed significantly since the start of 2010: at 10% and 4% respectively. This helps banks releverage, no doubt, but it makes quantitative easing sound like another bailout (and this is the 3rd such bailout).

I feel the best way to releverage the banks is to allow them to deleverage by suffering the pain of the bad securities (and bad loans) they have on their books. If the Fed continues this policy then it is should be a matter of about 10 or so years until this cycle repeats itself. Spare the rod and you spoil the child, so to speak.

 

[turbo]

I feel the best way to releverage the banks is to allow them to deleverage by suffering the pain of the bad securities (and bad loans) they have on their books. If the Fed continues this policy then it is should be a matter of about 10 or so years until this cycle repeats itself. Spare the rod and you spoil the child, so to speak.

I'm sure the bankers are dancing around in their pin-stripes and clinking their martini glasses. Unfortunately, people like my wife and and myself who have saved all of our lives are left with squat. We earn nothing on our savings, and that is so wrong. We should be able to live comfortably off the interest earned on our savings, but that is not the case because the Fed is shoveling free money to the banks. If Bernanke should drop dead tomorrow, Wall Street would offer up another clone, and Obama's administration would pull him in. We need fundamental changes in DC.

 

[JonDE]

I'm sure the bankers are dancing around in their pin-stripes and clinking their martini glasses. Unfortunately, people like my wife and and myself who have saved all of our lives are left with squat. We earn nothing on our savings, and that is so wrong. We should be able to live comfortably off the interest earned on our savings, but that is not the case because the Fed is shoveling free money to the banks. If Bernanke should drop dead tomorrow, Wall Street would offer up another clone, and Obama's administration would pull him in. We need fundamental changes in DC.

You have to go where the money is. For the past 4 years the money has been in the stock market, that is where I have put my money and I have made an absolute killing. If you keep your money in a savings account you won't make any real money for some years to come.

Even if Obama loses the election and Bernanke is replaced by someone that doesn't want QE, you are not going to see a drastic increase in savings rates. This is because NO ONE would raise interest rates, it would only slow the economy down further. No one wants that and no one would do that.

 

[chemisttree]

It's pretty clear that the Fed is entering the political arena. This is unprecedented IMO. There was a time when the FED wouldn't do anything so near an election to avoid the appearance of political favoritism. Are there any examples prior to this where the FED conducted such an operation so near an election?
Bernanke is clearly Obama's thrall. Disgusting.