Wonkbook: Everything you need to know about the Fed’s big move

September 14, 2012

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Top story: Everything you need to know about QEWheeeeee

The Fed announced a new open-ended mortgage bond-buying program. "The Federal Reserve on Thursday took a series of extraordinary actions to stimulate the economy and reduce unemployment...For the first time, it made a definitive promise that it would keep interest rates ultra-low even if the economy starts to recover. That sent a clear signal that for years it will be cheap for consumers to borrow to buy homes and cars or for businesses to get loans to expand. To reinforce the point, the Fed said it will buy $40 billion per month in mortgage bonds in addition to $45 billion in Treasury bonds through the end of the year, a process known as 'quantitative easing.' After that, the Fed will reassess its actions, but it is likely to continue buying tens of billions of dollars of mortgage bonds unless the economy suddenly shows signs of a major rebound." Zachary Goldfarb in The Washington Post.

Read: The Federal Open Market Committee's statement in full.

Excerpts: "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...[These actions] should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative...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...[E]xceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015."

See also: The FOMC's forecasts for economic growth, unemployment, inflation, and the federal funds rate.

Wonkblog explains: FAQ about quantitative easing.

What the Fed is looking for: big gains in payrolls, big drop in unemployment rate. "The Federal Reserve, frustrated by persistently high U.S. unemployment and the torpid recovery, launched an aggressive program to spur the economy..'We want to see more jobs,' Fed Chairman Ben Bernanke said at a news conference Thursday, explaining the rationale for the Fed's actions. 'We want to see lower unemployment. We want to see a stronger economy that can cause the improvement to be sustained.'" Jon Hilsenrath and Kristina Peterson in The Wall Street Journal.

@ryanavent: I think this could be enough to change the trajectory of recovery.

Here's what the economists said. "'Altogether, we interpret today’s action as a bold shift in Fed policy...These moves indicate the accommodation switch has been “turned on” and the data have to tell the committee when to stop. On the other hand, boldness has been traded for more uncertainty, as the overall amount and duration of Fed purchases will be dependent on evolving economic conditions.'...'So going forward, it appears as though developments in the labor market will be the crucial indicator as to whether QE continues and if it does, in what form. We’re not sure what the economic effects of this program will be -- it should help growth and employment on the margin -- but of all the announcements the Fed could have made today, this is very nearly one of the most accommodative that could have been reasonably expected.'" Ben Casselman in The Wall Street Journal.

@bcappelbaum: Seems to me the shift in strategy is much more important here than modest purchases.

Financial markets were jubilant. "Financial markets soared Thursday after the Federal Reserve announced its new program to buy financial assets to inject money into the U.S. economy. The surge began midday, as the central bank unveiled its third round of quantitative easing, or QE3. The S&P 500 climbed 1.6 percent, to close at 1459.99. The Dow Jones industrial average jumped 206 points, or 1.5 percent, to 13,539.86. Both indicators closed at their highest levels since December 2007. For weeks now, financial markets have been expecting the Fed to take some action to stimulate the economy. But few observers expected that the central bank’s moves would be so dramatic. Previous quantitative easing efforts have been limited jolts, but the Fed is now saying that it will continue to act until the labor market improves 'substantially.' That open-ended commitment was a radical break with past practice." Brad Plumer in The Washington Post.

@ModeledBehavior: The key thing that Woodford does not and of course cannot say is that he intimidated the hawks. BB's tone is more important than specifics

Romney camp spins Fed action as sign of Obama's failure. "Presidential candidate Mitt Romney’s campaign came out against the Federal Reserve’s announcement of a third round of quantitative easing today, with policy adviser Lanhee Chen calling it 'further confirmation that President Obama’s policies have not worked.' Calling the Fed’s attempts to stimulate the economy through bond-buying 'artificial and ineffective measures,' Chen added, 'we should be creating wealth, not printing dollars.' For months on the campaign trail, Romney has voiced skepticism of quantitative easing policies." Philip Rucker in The Washington Post.

@DLeonhardt: Shorter Bernanke: I think I was wrong. I'm changing course.

What the Fed's next move may look like. "Today the Fed announced Unlimited QE, meaning that it will buy bonds until the labor market improves 'substantially.'...So let's say things stay kind of sluggish, and the Fed wants to boost things some more. What does it do? It starts to define the word 'substantially.'...Mr. Bernanke hinted at further communication changes in an even more aggressive direction if today's actions prove insufficient. In response to a question, he said 'clarifying our response to economic conditions might be one way in which we could further provide accommodation.'" Joe Weisenthal in Business Insider.

@esoltas: Defining substantial improvement in the labor market outlook is the one missing piece of this FOMC statement. Don't overlook this, guys.

BARRO: Why QE3 will be a 'win-win-win.' "Today’s Federal Reserve announcement is a big deal. We’re not just getting another round of quantitative easing, but an open-ended one that will continue until the labor market improves. While overly tight monetary policy has hit the unemployed the hardest, it has been bad for almost everybody, including rich people. It’s true that disinflation has been good for certain securities, particularly low-risk bonds. But wealthy bondholders also tend to be wealthy stockholders, and Fed policies that hold economic growth down are bad for equities. Most advocates of hard money are simply making a mistake, not putting their interests ahead of the common good. The great thing about good policy is that it is a positive-sum game. A Fed that credibly promises to ease until unemployment falls will both put people back to work and grow the economy faster, driving up stock prices. That's a win for capital, a win for labor and, if he gets credit for an accelerated recovery, a win for Ben Bernanke." Josh Barro inBloomberg.

KLEIN: Bernanke, the economy's tough older friend. "[T]he other part of the plan, and this part is really important, is that Bernanke just sent a signal to businesses and investors and the market and everyone else that the Fed is going to use its powers in a big, unusual way to get the economy moving...Think of it this way. The Federal Reserve is kind of like the economy’s tough, older friend. If the economy is having problems with some kids at school, and the tough, older friend seems distant, or uninterested, then the economy’s in trouble. But if the tough, older friend makes it clear that he’ll be there to back up the economy, come whatmay, and even says that he’s going to go have a talk with some of these kids tomorrow, then the economy is going to be a lot more confident walking to school from now on. And right now, what the economy needs, more than anything, is confidence." Ezra Klein in The Washington Post.

SOLOMON: Fed swings. Ball lands in the fiscal side of the court. "Bernanke himself has said monetary policy can only do so much, a position with which many economists agree...[T]he overall impact, while helpful, is unlikely to solve the economy's broader woes. The answer to that riddle lies with Congress, which needs to enact some type of short-term stimulus to give consumers confidence to spend while dealing with the fiscal problems that threaten to inflict huge pain on the U.S. in the long-run. Today's move shows Bernanke is willing to do what it takes to get the economy moving, but he can only do so much. Like it or not, true economic salvation rests with Congress." Deborah Solomon in Bloomberg.

THE NEW YORK TIMES: Applause for the Fed. "If the economy falters from here on out, it will be difficult to blame the Federal Reserve...The open-ended nature of the plan and its linkage to jobs are welcome changes from previous interventions. Those efforts came with preset limits and expiration dates and thus had a sporadic quality that made them seem disconnected from the actual state of the economy...The economy needs more help than the Fed can provide. But the Fed is to be applauded for doing what it can." The New York Times Editorial Board.

THE WALL STREET JOURNAL: The Fed's 'brave new world'. "Chairman Ben Bernanke and his music men at the Fed's Open Market Committee put on their party hats Thursday and unleashed an unlimited program of monetary easing...[I]f 'the labor market does not improve substantially,' as the central bankers put it, the Fed will plunge ahead and buy more assets. And if that doesn't work, it will buy still more. And if... [ellipsis in original] The Fed statement paid lip service to pursuing its 'dual mandate' of controlling inflation and reducing unemployment, but no one should be fooled. The Fed has declared that it is going all-in to cut the jobless rate, no matter what it takes." The Wall Street Journal Editorial Board.

Top op-eds

KLEIN: Dreaming about good outcomes from the fiscal cliff. "I’ll admit it. Sometimes, when this election gets too small or depressing, I fantasize about the fiscal cliff. What, you don’t fantasize about the fiscal cliff? In my dream, Republican leaders huddle in a room trying to determine what they can offer Democrats to avoid that nightmare. At some late hour, either shortly before or shortly after the nation has plunged over the fiscal cliff, when both parties are exhausted from fruitless negotiations, Senate Minority Leader Mitch McConnell -- even if Republicans win the Senate, which I think they are likely to do, McConnell won’t become majority leader until the 113th Congress is sworn in -- makes a move. He takes his old colleague Joe Biden aside and proposes the following: Cut your revenue demand in half and, as part of a comprehensive tax reform, Republicans will agree to a $20-per-ton tax on carbon emissions." Ezra Klein in Bloomberg.

KRUGMAN: What the iPhone 5 says about the economy. "What I’m interested in, instead, are suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy, adding measurably to economic growth over the next quarter or two. Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian -- and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy...And to believe that more spending will provide an economic boost, you have to believe -- as you should -- that demand, not supply, is what’s holding the economy back. We don’t have high unemployment because Americans don’t want to work, and we don’t have high unemployment because workers lack the right skills." Paul Krugman in The New York Times.

MCCAIN, HUTCHINSON, AND CHAMBLISS: Don't do cybersecurity by executive order. "The White House is preparing an executive order on cybersecurity that unilaterally imposes more mandates and regulations on the private economy...Cybersecurity is a priority, but anything less than a strong information-sharing bill, based on policies that enhance national security and the economy, will fall short. The Senate needs to follow the lead of the House and pass a bipartisan bill that includes clear authority to do so, and provides liability protections to allow the private sector and government to better share cyber-threat information...Yet now it appears the administration is set to act on its own. That's the wrong solution because it cannot fully address the one area most critical to improving cybersecurity -- enhancing the sharing of cyber-threat information among private firms and with the government." John McCain, Kay Bailey Hutchinson, and Saxby Chambliss in The Wall Street Journal.

STRASSEL: Romney needs to trust his pants. "In the classic 1968 film 'Once Upon a Time in the West,' a villainous Henry Fonda shoots one of his lackeys, in part for the sin of wearing both a belt and suspenders. How do you trust a man, muses Fonda, who 'can't even trust his own pants?' Mitt Romney is slipping in the polls because, when it comes to his own policies, he is once again wearing a belt, suspenders, and even some elasticized waistbands. The bold Romney who picked Paul Ryan as a catalyst to run on ideas has been ousted by the return of the careful Romney who wants this race to be about Barack Obama. And America is unwilling to trust a man who seems unwilling to trust his own agenda." Kimbereley A. Strassel in The Wall Street Journal.

MARSHALL: Capitalism and government are BFFs. "Americans will be getting an earful about the perils or virtues of government until they vote on Nov. 6. But they won’t hear anything about what it is exactly...[T]he deeper role that it plays in our lives [lies in] creating and maintaining the very marketplace that Republicans worship. There is this idea, not discussed because it is so widely accepted even on the political left, that some sort of independent, free-standing market exists with its own laws, similar to those of natural systems, such as the law of gravity. Democrats want to poke, prod and regulate this market; Republicans say they want to leave it alone. But this so-called free market doesn’t exist, not even as a valid concept. Governments create markets." Alex Marshall in Bloomberg.

Thoughtful interlude: Strange first names are presidential.

Got tips, additions, or comments? E-mail me.

Still to come: foreign investment is collapsing; why calorie labels don't really work that well; how the government fights poverty with policy; rising oil prices; and how dredging works.

Economy

Foreign investment is collapsing. That's an awful sign for the global economy. "Uncertainty about the outlook for the global economy and fears of rising protectionism have led to a sharp fall in foreign investment by businesses, the Organization for Economic Cooperation and Development said Thursday...[N]et international M&A—the difference between new investments and sales of assets—will fall to $317 billion, its lowest level since 2004." Paul Hannon and Jessica Hodgson in The Wall Street Journal.

Wonkblog explains: Summaries of new economic research you've got to read.

Greece may need more aid. But it will have to come from Euro governments. "Greece will need additional funding from its creditors to overcome its budget gap, the country's representative on the International Monetary Fund's board said Thursday. For many, such a plan would be tantamount to a third bailout of the country in as many years...The Fund has indicated in the past that any further financing of Greece would have to come from the European creditors...The IMF's status as a senior creditor in the Greek bailout is guaranteed by its charter, itself a product of an international agreement of sovereign states. The Fund's charter doesn't allow it to lend to countries where it sees no path back to a sustainable level of debt." Costas Paris in The Wall Street Journal.

The European Central Bank's plan looks to be working. "The European Central Bank's new crisis-fighting plans passed a major test of investor confidence Thursday, when Italy successfully issued its most long-term debt since July 2011...Along with offering debt maturing in 2015 and 2017, Italy reopened a bond maturing in 2026. Analysts said Italy wouldn't have undertaken an issue of bonds with such a long maturity in shakier market conditions. Altogether, the government achieved its maximum target of raising €6.5 billion ($8.4 billion) through the issue of the three bonds." Emese Bartha in The Wall Street Journal.

@Neil_Irwin: ECB action last week and Fed this week have this in common: Sweeping, longer-term strategies, not one-off improvisation.

Economic data wrap-up. "Producer prices rose the most in three years in August as energy costs surged, but fairly benign underlying inflation pressures should help the Federal Reserve maintain its accommodative monetary policy stance. Other data released on Thursday underscored the weakness in the labor market, a major concern for the Fed. The number of Americans filing new claims for unemployment benefits touched a two-month high, although some of the increase was attributed to Tropical Storm Isaac." Reuters.

TGIF music interlude: James Taylor, "Fire and Rain," 1970.

Health Care

Menu labels offer only limited gains for consumers. "[W]ill it change eating habits? New York City has had calorie labels on all chain menus since 2008. The evidence is mixed, but tends to lean against these changes having a significant public health impact.... New York City residents studied here, who came from low-income demographics, purchased the same amount of calories before and after the labels came online...A more recent study, conducted by the New York City Department of Public Health, was more promising...Overall, it showed no difference in calorie consumption. Only 15 percent of the customers they talked to reported using the labels to make a purchasing decision, a number in line with the prior study. Among that sub-population, however, this study did find a change: They purchased 96 fewer calories than the average customer, translating into a meal that was 11 percent smaller." Sarah Kliff in The Washington Post.

Domestic Policy

The Consumer Financial Protection Bureau goes before Congress. "Cordray, in a semi-annual report to Congress, touted the bureau’s accomplishments in drafting rules to fix mortgage servicing and supervising the previously unregulated non-bank financial firms...He added that the bureau is working on rules to bring greater transparency to prepaid debit cards and is fine-tuning its consumer complaint database — as of Sept. 3, the agency had received 72,297 complaints about mortgages, student loans and credit cards." Danielle Douglas in The Washington Post.

How government fights poverty, in one chart. "In 2011, the poverty rate not including unemployment insurance or Social Security would have been 7.8 percentage points higher, and it would have been 3.1 points lower if you take food stamps and EITC into account. So all told, these four government programs reduced poverty by 10.9 percent, or 33.6 million people." Dylan Matthews in The Washington Post.

@justinwolfers: Why we've missed the decline in poverty: We're using tax credits & in-kind transfers to help the poor but official measure ignores 'em

Engineering interlude: How dredging works.

Energy

Fossil fuel ads are all over the campaign. "When Barack Obama first ran for president, being green was so popular that oil companies like Chevron were boasting about their commitment to renewable energy, and his Republican opponent, John McCain, supported action on global warming. As Mr. Obama seeks re-election, that world is a distant memory. Some of the mightiest players in the oil, gas and coal industries are financing an aggressive effort to defeat him, or at least press him to adopt policies that are friendlier to fossil fuels. And the president’s former allies in promoting wind and solar power and caps on greenhouse gases? They are disenchanted and sitting on their wallets." Eric Lipton and Clifford Krauss in The New York Times.

Turmoil in Middle East sends oil prices rising. "Crude oil hit a four-month high as the killing of the US ambassador to Libya and fears of unrest in the Middle East fuelled supply concerns in an already tight market. ICE October Brent jumped to $117.48 a barrel in Europe amid worries that this week’s attack on the US consulate in Benghazi could lead to a return of violence and hit a shaky recovery in oil production in the country...Oil prices have rallied more than 30 per cent since mid-June because of rising geopolitical tensions, better than expected demand growth and the impact of US and European sanctions on Iran’s oil exports." Emiko Terazono in The Financial Times.

Wonkbook is produced with help from Michelle Williams.

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