Bernanke goes all in, again – Image credit: Getty Images via @daylife
Ben Bernanke continues to make history at the Federal Reserve. On Wednesday, the FOMC announced more quantitative easing at a rate of $85 billion a month for an extended period of time. The Bernanke Fed has also modified its guidance, noting its ultra-accommodative stance will remain in place until the unemployment rate falls below 6.5% and inflation projections remain no more than half a percentage point above 2% two years out.
QE4 is here. Only a few months after announcing what had been dubbed QE3, an open-ended $40 billion a month program to buy up mortgage backed securities (MBS), the FOMC decided to extend its asset purchases in 2013 as Operation Twist expires.
The Fed will therefore accelerate its rate of balance sheet expansion, easing monetary conditions further. While Operation Twist had been sterilized, which means the Fed sold assets at the same rate as it was gobbling them up, the new program will consist purely of Treasury purchases. Combined with QE3, the Fed will be taking $85 billion in bonds, both Treasuries and MBS, out of the market. The FOMC also decided to begin rolling over its maturing Treasuries as of January.
Bernanke’s biggest surprise came in terms of the Fed’s forward guidance. The FOMC moved from a calendar-based guidance to one tied to economic factors, specifically, inflation and unemployment (which constitute the Federal Reserve’s dual mandate):
In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy.
While QE4 was widely expected, the Fed’s move to a new type of guidance came as a surprise. Stock markets, which rallied on Tuesday, rose in the aftermath of the decision, while the rate on 10-year Treasuries slid to 1.65% and gold inched up. Major financials like Wells Fargo, Bank of America, and JPMorgan Chase rose on the news.
Invetors will now turn their eyes to Chairman Bernanke’s press conference to clarify any issues, scheduled to start at 2:15 PM eastern time.