From the Fed's latest policy statement:
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.
So, why is the Fed acting Now?
remember that many people are of the opinion the Fed should have been
acting a long time ago. Krugman and Thoma are both examples of people
who have been calling for Fed action pretty consistently for at least a
year, if not longer. I think you can also put DeLong in that camp.
I'm less inclined to think action is a good thing. Not because it's
bad, but because I think we're seeing diminishing returns from the Fed's
actions. While the first QE was helpful, we're seeing less bang for
the buck from operation twist. And while expanding into the MBS market
should help to suppress rates across a wider spectrum of markets, the low
rates from the Treasury market are already helping in the mortgage area
(treasuries and MBS are linked in the market to a certain extent). Consider this chart:
also don't think the expectations game is that important -- that is,
for the Fed to say, "we'll keep rates low until this date." And,
frankly, I don't think that GDP targeting would really make that big an
impact on the market or the economy. I think most market participants
currently accept the fact that the Fed will be very loose with policy
for a long time and that's enough.
problem we're facing is fiscal and not monetary. There is a large
output gap in the economy that can really only be closed by fiscal
spending which we're clearly not going to do. And Washington is run by a
bunch of idiots -- we have the Republicans who live in a completely
alternate universe and the Democrats who have no spine. As a result,
the Fed's hand has been more or less forced by the market and the
government's overall inaction.
I do think the Fed is
acting now because they see a pronounced slowdown in employment over
the last few months which runs against half of their duel mandate.
Consider this graph:
how the arc is slowing. In the last 5 months, we've seen less than
600,000 jobs created which is terrible and indicates there is something
wrong in the economy. And in the latest BLS report, previous months figures were revised lower.
I also think that Fed is aware that the power of their ammunition is
decreasing with each move, so they are trying to time their actions to
have the most impact possible.
That being said, I think
Ben's choice of action is very interesting. As both NDD and I have
noted, the housing market has bottomed and is moving higher. Granted,
this is from a low base. But, we are seeing a turnaround. In addition,
housing has been a primary driver of a majority of post-WWII recoveries. By buying MBS, the Fed is trying to maximize it's impact. Despite my reservations, it will work.