It is almost impossible to imagine the Federal Reserve, as currently constituted, acting more aggressively to speed up the economy than it did Thursday afternoon. After months of tinkering with monetary policy on the margins of an ongoing American jobs crisis, amid escalating cries that Ben Bernanke had run out of weapons to fight unemployment, the Fed has unleashed a full and sustained burst of monetary stimulus.
Bernanke’s third round of quantitative easing, the so-called QE3, arrived Thursday, accompanied by the most explicit assurances yet that monetary policymakers will do whatever they can to steer the economy back to a place where every American who wants to work can find a job. It is an open-ended commitment: buying $40 billion of mortgage-backed securities a month until the labor market improves “substantially.”
And it comes with this promise, from the Federal Open Market Committee statement: “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 economic recovery strengthens.” The committee added it anticipates keeping interest rates near zero “at least through mid-2015.”
Translation: The securities purchases will continue until the Fed is convinced we have a true, full-speed recovery, and not the weak and halting growth of the last three years.
Don’t expect QE3 to solve the economy overnight, or even improve it appreciably before the November election. Buying securities pushes down long-term interest rates and the value of the dollar against other currencies, both in hopes of spurring more economic activity (through, for example, increased mortgage refinancing and faster export growth). Those effects take time.
But don’t underestimate this move. It is Bernanke saying he’s serious about growth and relatively unconcerned with inflation-hawk warnings that overly aggressive action could trigger a spike in consumer prices. It is the Fed trying to give businesses confidence that, even as the nation barrels toward another fiscal crisis at the end of the year, monetary policy remains on the case for growth.
Almost everything we know about Bernanke, and the members of the committee he presides over, suggests this will be America’s last dose of monetary stimulus for a while. Bernanke has shown little appetite for other potential moves, such as cutting the interest rate the Fed pays on bank reserves, or adopting an explicit goal of growth plus inflation (commonly known as NGDP targeting).
“The other tools don’t really seem to be in play,” Morgan Stanley economist Vincent Reinhart said in a video this month previewing the Fed meeting. He’s probably right. Hopefully, we won’t need any more.