Thursday, September 13, 2012

Fed Undertakes QE3 With $40 Billion MBS Purchases Per Month


Sept. 13 (Bloomberg) -- 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.”
Stocks jumped, sending benchmark indexes to the highest levels since 2007, as the Fed said it will continue buying assets, undertake additional purchases and employ other policy tools as appropriate “if the outlook for the labor market does not improve substantially.”
Bernanke is enlarging his supply of unconventional tools to attack unemployment stuck above 8 percent since February 2009, a situation he called a “grave concern.” The decision immediately provoked a renewed backlash from Republicans, including Senator Bob Corker of Tennessee, who said Bernanke’s policies damage the Fed’s credibility while doing little to spur the economy.
The FOMC also said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

Stocks Rally

The Standard & Poor’s 500 Index jumped 1.6 percent to 1,459.99 at the close of trading in New York. The yield on the 10-year Treasury note rose to 1.74 percent from as low as 1.71 percent.
This is definitely a significant shift in FOMC policy,” said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former Fed economist. “This is a very aggressive commitment to success on its mandates.”
Bernanke said the open-ended purchases would continue until the labor market improved significantly. “We’re not going to rush to begin to tighten policy,” he said. “We’re going to give it some time to make sure that the economy is well established.”
The central bank also released its economic forecasts for growth, inflation, unemployment and interest rates over the next three years. Twelve of the Fed’s 19 policy makers said interest rates should rise for the first time in 2015.

Job Outlook

The Fed now expects the job-market outlook to improve more swiftly by 2014, with unemployment forecast to fall to 6.7 percent to 7.3 percent, compared with 7 percent to 7.7 percent in their June projections. In 2015, unemployment will fall to 6 percent to 6.8 percent.
Growth will improve to as much as 3 percent next year and as much as 3.8 percent in 2014, up from upper estimates of 2.8 percent and 3.5 percent in their previous forecasts. The so- called central tendency forecasts exclude the three highest and three lowest of 19 estimates.
While the U.S. has “enjoyed broad price stability” since the mid-1990s, the employment situation remains a “grave concern,” Bernanke said. “The weak job market should concern every American.”

Operation Twist

The Fed said it will continue its program to swap $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.
The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the statement said.

Richmond Fed President Jeffrey Lacker dissented for the sixth consecutive meeting, saying he opposed additional asset purchases. Lacker opposed the FOMC’s June decision to extend Operation Twist through the end of the year and has said he expects interest rates will need to be raised in 2013.
Today’s Fed meeting comes less than two weeks after Bernanke’s Aug. 31 speech in Jackson Hole, Wyoming, when he lamented the state of the labor market and defended his “nontraditional policies,” saying “the costs, when considered carefully, appear manageable.”

Employment Data

Weak employment data has increased pressure on the central bank to act. The Labor Department said Sept. 7 that the economy added 96,000 jobs in August, less than forecast by economists and down from a 141,000 increase in July. Average hourly earnings were little changed, and 368,000 Americans left the labor force.
Economic growth slowed to a 1.7 percent annual pace in the second quarter from 4.1 percent in the final three months of last year. Growth will average 2.1 percent next year, according to the median forecast in a Bloomberg News survey of economists, and the jobless rate will average 7.9 percent.
Bernanke, a scholar of the Great Depression, has deployed the most aggressive monetary policies since the Fed’s founding nearly a century ago as he battled the 2007-2009 financial crisis, helped pull the nation out of the worst recession since the 1930s and then sought to keep the expansion going.

Target Rate

The Fed lowered its target interest rate to zero in December 2008 and undertook two rounds of large-scale asset purchases that swelled its balance sheet to almost $3 trillion from less than $900 billion in December 2007, when the recession began.
Republican lawmakers criticized the Fed’s action, with Tennessee’s Corker saying in a statement that Bernanke is “beginning to do serious damage to the Fed as an institution.”
Open-ended purchases of mortgage-backed securities will politicize the Fed and add substantially to its balance sheet risks, but it will not help our economy’s long-term growth prospects,” Corker said.
Alabama Representative Spencer Bachus, chairman of the House Financial Services Committee, said in a statement that the Fed’s action is a “scathing indictment” of the Obama administration’s economic policies, which he said had “failed to produce a sustainable recovery or put Americans back to work.”

Romney View

Republican presidential candidate Mitt Romney has said he wouldn’t reappoint Bernanke when his term ends in January 2014. Lanhee Chen, Romney’s policy director, said the announcement of QE3 is “further confirmation that President Obama’s policies have not worked.”
We should be creating wealth, not printing dollars,” Chen said in a statement.
Bernanke said today that the central bank didn’t take into account the November presidential and congressional elections in its decisions.
We have tried very hard to be non-partisan and apolitical,” Bernanke said. “We make our decisions entirely on the state of the economy.”
Bernanke’s policies have also raised doubts within the central bank. Fed district bank presidents, including Richmond’s Lacker, Philadelphia’s Charles Plosser and Dennis Lockhart of Atlanta, have also raised concerns about inflation or whether more Fed action would help fuel growth.

Fed Study

Bernanke, in his Jackson Hole speech, cited a Fed study showing that large-scale asset purchases may have raised the level of economic output by almost 3 percent and boosted private payroll employment by more than 2 million jobs.
What’s more, Bernanke said, Fed the purchases have created “few if any” disruptions to market functioning, and there are no signs the expanding balance sheet has “materially affected inflation expectations.”
Bernanke repeated in his press conference that monetary policy is “not a panacea.”
The U.S. economy is vulnerable to the so-called fiscal cliff, the $600 billion of tax increases and spending cuts that will kick in automatically at the end of the year unless Congress acts. The Congressional Budget Office said in an Aug. 22 economic report that fiscal tightening of that magnitude could cause a recession.
We’ve got a U.S. economy where we have looming tax increases that are quite significant, we have looming spending cuts in the government which are quite significant,” Michael DeWalt, the director of investor relations for Peoria, Illinois- based Caterpillar Inc., said in a Sept. 6 presentation. A lot of customers are “unsure about what to do, highly uncertain about where it’s going to go at the end of the year.”

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