What did the Fed do for the economy?

September 13, 2012
Fed shows it’s serious

The Federal Reserve did three things Thursday meant to speed up the economic recovery. It did not depart much from its standard repertoire of policy tools, but the effort is perhaps the most dramatic action the central bank has taken to date.

Most notable is the announcement of a third round of quantitative easing, or the buying of bonds with the intent of lowering interest rates. In the first round of quantitative easing, starting in 2008, the Fed bought mortgage bonds — which lowered interest rates for homeowners and took risky assets off of banks’ balance sheets, enabling them to lend more freely — as well as Treasury bonds, safe assets whose interest rates were already very low.

In the second round, starting in 2010, the Fed bought more Treasury bonds.

This time around, the Fed is buying $45 billion in Treasury bonds and $40 billion in mortgage-backed securities every month for the rest of the year.

And for the first time, the purchases are open-ended. The Fed said Thursday that it will keep purchasing bonds on a monthly basis as long as the economy is weak enough to make it necessary. This is a departure from the first two rounds, in which it set the dollar value of bonds to be purchased before the easing started. Some critics have charged that past rounds provided an insufficient amount of stimulus, and tying the amount of bonds purchased to economic conditions addresses this concern.

The Fed also stated that it expects to keep interest rates on its funds at their current very low rate until mid-2015. In past statements, Fed officials have committed to keeping funds at this level until the end of 2014, so this represents a stronger commitment to loose rates.

But more important still, the bank stated that it “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” That means that it will continue its policies even if growth increases, reassuring investors and businesses who feared that bond buys would stop and rates would increase should growth start to pick up. Thursday’s statement suggests that the Fed is committed to not nipping a recovery in the bud.

— Dylan Matthews

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