Fed Opts for Quantitative Easing in the Face of Somber Economic Outlook
The main question about the outcome of today's FOMC meeting was whether there would be any shift in the Fed position on the outright purchases of longer-term government Treasuries. Today's statement provided the answer that "Yes" it would undertake these purchases to the tune of $300 billion during the next six months.
This move indicates that the central bank is pulling out all the stops in trying to turn around the economic downturn by opting for the relatively aggressive quantitative easing on top of various initiatives at credit easing. The latter entails the more selective purchases of assets, in particular financial markets, although on this front as well the Fed indicated that they were expanding the amount of its purchases.
For example, it announced an additional US$750 billion in purchases of agency mortgage-backed securities (MBS) that would result in total purchases this year of US$1.25 trillion. The purchase of agency debt was increased by US$100 billion to US$200 billion. These initiatives to date have been largely funded by the Fed expanding its balance sheet and this will likely continue to be the case. In other words, the printing presses are running!
On the interest rate front, the Fed indicated that it would continue to maintain the 0 to ¼ percent range and would likely continue to do so "for an extended period." All policy actions were approved unanimously by the FOMC.
Justification for the Fed's increasingly aggressive actions was provided by a relatively somber assessment of the economy that it characterized as weak and continuing to contract since the last FOMC meeting in January. The Fed opted not to acknowledge some recent hopeful signs on consumer spending. It did allow that aggressive fiscal and monetary policy actions "will contribute to a gradual resumption of sustainable economic growth," although there was no indication of when. In January, the Fed indicated that "a gradual recovery in economic activity will begin later this year."
The discussion of inflation provided addition scope for aggressive policy easing. The central bank's base line forecast was for inflation to remain subdued. However, the main risk to this outlook was "that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."
RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.
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