Fed Announces Open Ended QE3


This is a big deal: The Federal Reserve announced this afternoon that it would pursue a third round of quantitative easing, known as QE3. And unlike previous rounds, this one has no predetermined end date.

The central bank said that it will continue adding to its balance sheet by about $40 billion each month — essentially creating additional currency and adding it to the money supply — indefinitely. The Federal Reserve also made clear that it will extend its current "exceptionally low" interest rate on federal funds through at least the middle of 2015. Here's the key portion of the statement:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.  Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.  The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

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. 

Quantitative easing is frequently described as "unconventional monetary policy," but the open-ended nature of this bond-buying commitment is unique even by the standards of previous actions. It brings the Federal Reserve closer to a policy idea that's become known as NGDP (Nominal Growth Domestic Product) targeting, in which the Fed basically says it will continue buying bonds until the economy reaches a certain target level of inflation and growth. This new round of QE isn't pegged to any sort of economic target, but it does commit the Fed to printing money until, well…whenever it feels like stopping. But taking this idea on its own terms, the Fed's announcement might undermine the way NGDP targeting is supposed to work. The idea is that the Fed provides both confidence and clarity: It will print money until certain well-established targets are met, and boost demand and economic activity as a result. But without a defined target, the uncertainty still exists. 

Did the last round of QE work? Experts weren't so sure when the policy was announced. And they were even less sure after it finished. Here's Steve Chapman with the case against tight money policies. And here's Anthony Randazzo and James Groth on the failures of quantative easing