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Fed Adopts Familiar Stimulus Plan, Will Spend $40B Monthly on MBS

The Federal Open Market Committee announced Thursday a new plan to stimulate a moribund economy â€" continuing two earlier plans which at best stopped the economy from contracting. The ""FOMC"":http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm said it would keep the federal funds rate near zero into mid-2015, six months longer than it had said previously.

Separately, later in the day, the Fed issued its ""projections"":http://www.federalreserve.gov/newsevents/press/monetary/fomcprojtabl20120913.pdf for the economy out to 2015, a more optimistic outlook than previous forecasts. The projection showed the economy growing as fast as 3.8 percent in 2014 compared with 3.5 percent and a 7.3 percent unemployment rate, down from 7.7 percent.


The FOMC voted 11-1 ""to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month"" while continuing ""through the end of the year its program to extend the average maturity of its holdings of securities as announced in June.""

The Fed said 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.""

Taken together, the FOMC said, the actions ""will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year [and] should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.""

The FOMC acted after what it said was ""information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months.""

The Fed painted a grim picture of the economy.

""Growth in employment has been slow, and the unemployment rate remains elevated,"" it said in a statement issued at the conclusion of its two day meeting in Washington.

""Household spending has continued to advance, but growth in business fixed investment appears to have slowed,"" the Committee said. ""The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.""

The policy-setting body put no timetable on its new program, quickly dubbed ""QE3"" as the third round of ""quantitative easing,"" a strategy by which the Fed attempts to influence, rather than specifically set, interest rates.

But the Committee did vote ""to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.""

The actions, the FOMC said, were taken ""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.""

At a press conference later in the day, Fed Chairman Ben Bernanke defended the continued low interest rates. He acknowledged the negative impact on savers, but said the low interest rates support the value of other assets such as homes.

For consumers and businesses, the extension of the low interest rates provides some measure of certainty for the cost of loans such as home equity and many auto loans that are tied to the prime rate. The prime is generally fixed at three percentage points above the fed funds rate.

Those actions though will not directly address the Federal Reserve's two policy mandates: price stability and maximum sustainable economic growth â€" usually measured by the unemployment rate.

The lone dissent to the policy actions came from Jeffrey M. Lacker, president of the Richmond Fed, who, the post-meeting statement reported ""opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.""

The Committee said it ""will closely monitor incoming information on economic and financial developments in coming months, adding ""if the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.""

Since Treasury securities are issued to cover the difference between revenues and expenses -- the budget deficit --the Fed action essentially ""monetizes"" the deficit and allows the government to continue spend more money than it takes in.

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.

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