The Federal Reserve did just enough today to be seen as exceeding expectations, but not nearly enough to satisfy those looking for a game changing announcement from the central bank.

The policy comes in three parts. The first is “Operation Twist”: The Federal Reserve will purchase $400 billion in Treasury securities that don’t come due for six to 30 years and sell $400 billion in Treasury securities that come due in three years or less. The hope is to make spending money now more attractive by lowering the interest you get when you sock the money away for later.


The more unexpected announcement is that the Fed is going to continue purchasing Fannie- and Freddie-backed mortgage debt in order to support the housing market. Those purchases were part of the first round of quantitative easing, and many experts thought they did more to support the recovery than the Fed’s subsequent turn to buying Treasury debt. This doesn’t necessarily increase the Fed’s holdings, but it means it is unexpectedly going to keep its holdings relatively steady, which should help keep mortgage rates low.

Finally, the Fed continued to say that interest rates are likely to remain extraordinarily low “at least through mid-2013.” Again, the hope here is that this will provide an incentive for people to invest now rather than to wait until later, when interest rates, and thus borrowing costs, might be higher.

But there was much that the Fed didn’t do. It didn’t release a statement saying it would swing its policy toward lowering the unemployment rate. It didn’t say it would strive for a period of catch-up inflation, nor that it would stop paying interest on bank reserves. It didn’t, in other words, really try anything it wasn’t already trying, and as such, there’s no reason to think the effect will be anything but modest.

Nevertheless, in exceeding the market’s expectations, the Fed perhaps made one more important announcement: it refuses to be cowed. The Republican Party had been putting extraordinary pressure on the central bank to cease its efforts to provide additional support to the economy. Most memorably, Texas Gov. Rick Perry suggested that further policies from Ben Bernanke would constitute “treason,” but more recently, the Republican leadership in both the House and the Senate wrote a letter to Bernanke opposing “additional monetary stimulus proposals.”

If the Fed had come in beneath expectations today, the market might have taken that as a sign that the pressure was working, and the Fed was now unlikely to intervene further in the market because it was worried about a political backlash. By coming in with a stronger-than-expected policy, Bernanke and his board showed that they were still in the game, and would continue to make policy despite the political pressure to do otherwise. If the economic conditions deteriorate further, that could prove to be a very big deal.

You can read the Fed’s statement here.