At the conclusion of its September 12-13 policy meeting, Chairman Ben Bernanke announced that the Fed Open Market Committee (FOMC) voted to implement QE3 immediately. Bernanke said that the Fed would begin buying an additional $40 billion a month in mortgage-backed securities in an effort to put more pressure on long-term interest rates and to boost the housing market.
The only surprise in the Fed’s announcement was that QE3 will be open-ended. Both QE1 and QE2 had a stated amount of bond purchases that would be made and a date as to when they would end. This time around, however, Bernanke made it clear that QE3 would be continued, basically, as long as it takes. He offered no guidelines as to how much the Fed would buy or how long they will continue to do so.
Essentially, Bernanke said that it all depends on the economy and in particular, the labor market. The Fed is already buying apprx. $45 billion in Treasury securities per month, so this latest QE3 announcement means the Fed will be buying apprx. $85 billion of combined long-term securities per month, at least until the end of this year when Operation Twist is scheduled to end.
In his press conference following the FOMC meeting, Bernanke seemed to emphasize that he had broad support among the voting members of the FOMC, and that is clear in the official policy statement. Only one FOMC member, Jeffrey Lacker (president of the Federal Reserve Bank of Richmond, VA), voted against QE3.
Lacker warned that the open-ended QE3 is likely to push up inflation. In a prepared statement on September 15, Lacker said the following:
“Unemployment does remain high by historical standards, but improvement in labor market conditions appears to have been held back by real impediments that are beyond the capacity of monetary policy to offset. In such circumstances, further monetary stimulus runs the risk of raising inflation in a way that threatens the stability of inflation expectations.” [Emphasis added.]
Mr. Lacker also objected to the Fed’s decision this month to specifically purchase additional mortgage-backed securities, rather than Treasuries. Though Fed officials hope buying mortgage bonds will help the housing market and prompt more spending, Lacker said the Fed shouldn’t be targeting particular pieces of the economy. Here is more:
“Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve.”
Lacker also disagreed with the Fed’s decision to extend its interest-rate guidance. Bernanke said that the FOMC now expects short-term rates will remain very low through at least mid-2015, beyond their previous estimate of late 2014. Fed officials also said they plan to keep the Fed’s easy-money policies in place even after the recovery starts to accelerate.
Lacker said he disagreed with the time period estimated for maintaining the Fed’s highly accommodative monetary policy. Keeping interest rates very low even after growth picks up would be “inconsistent with a balanced approach” to the Fed’s mandate, he said. The Fed is tasked with supporting both stable prices (low inflation) and maximum employment.
There are other Fed officials that share Lacker’s concerns about rising inflation as a result of the Fed’s latest open-ended policy. On Tuesday of this week, Charles Plosser (president of the Federal Reserve Bank of Philadelphia) voiced his concerns about QE3:
“We are unlikely to see much benefit to growth or employment from further asset purchases.” The additional large purchases, he said, “are unlikely to be effective in the current environment.”
In addition, Richard Fisher (president of the Federal Reserve Bank of Dallas) has raised repeated concerns about QE2 and now QE3. He said:
“It will come as no surprise to those who know me that I did not argue in favor of additional monetary accommodation during our meetings last week. I have repeatedly made it clear, in internal FOMC deliberations and in public speeches, that I believe that with each program we undertake to venture further in that direction, we are sailing deeper into uncharted waters.”
In case you’re wondering, Charles Plosser and Richard Fisher are not currently voting members on the FOMC. The voting members of the FOMC rotate among Fed officials periodically.
At the end of the day, the question is: Does Bernanke privately wish for higher inflation? Some argue that if inflation were to rise moderately, it would be good for the economy. One wonders what Big Ben may really be thinking.
Stocks rallied only briefly after the Fed’s announcement of open-ended QE3, and have since gone lower. Gold rallied. Certainly not the expected outcome of QE3. Go figure.
Have a great weekend everyone!