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Unemployment is at 8.2 percent and the Fed is tightening

So the Federal Reserve is going to keep on keeping on. See Brad for more details. But I want to make one point: The Fed didn't continue its stimulus today. Rather, it tightened policy.

In a research note released before the Fed's announcement, Jan Hatzius of Goldman Sachs puts it this way: “It is important to note that a decision not to ease is tantamount to a tightening. The reason is that the impact of unconventional easing ... ’decays’ over time.” So Operation Twist is becoming less useful the longer it goes on, which means simply continuing it at current levels means doing a bit less every day.

Doing the Twist. Again. (Tim Boyle/Bloomberg)

Moreover, Hatzius notes that many in the market — including Goldman Sachs — expected the Fed to do more, and disappointing those expectations will lead market participants to pull back and financial conditions to tighten further.

Now, that tightening may not happen if the market expects the Federal Reserve to do more soon. Economist Justin Wolfers tweets, "I read Fed as saying: One more bad jobs report, and we'll do more. Wouldn't be surprised at an inter-meeting move." The Washington Post's Neil Irwin, who's covered the Fed for a long time, agrees. If the market heard something similar, then their range of probabilities could be that either the economy improves or the Fed steps in more aggressively, and as such, there's no need to worry about today's announcement.

So what could they do? Here are some options from the Economist's Greg Ip:

Steps that were apparently passed over at today's meeting include: outright quantitative easing (buying longer-term bonds by creating new money), extending the verbal commitment of zero interest rates to the end of 2015 from 2014, buying mortgage-backed securities instead of Treasurys, or announcing an even larger Operation Twist.

I would add to that list NGDP targeting, as well as a round of quantitative easing that, like the first — but not the second — round of QE, focuses on assets in the real economy, like mortgage-backed securities.

We'll probably know a bit more at 2:15 p.m., when Federal Reserve Chairman Ben Bernanke gives his news conference.



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