Latest Move by the Federal Reserve Raises Important Questions

By:  Bob Adelmann
12/13/2012
       
Latest Move by the Federal Reserve Raises Important Questions

All the chairman of the Federal Reserve has done in his latest announcement of a new bond-buying program is give himself and his Federal Open Market Committee permission to buy government bonds forever.

With Federal Reserve Chairman Ben Bernanke’s latest announcement of a new bond-buying program linked to unemployment data instead of the calendar, commentators called it a “historic move,” “another innovation,” and a “surprise” that amounts to a “complete reversal” from the Fed’s days of using Fedspeak to disguise and obfuscate its moves.

After reviewing how the economy looks from the Fed’s point of view, Bernanke announced that his Federal Open Market Committee (FOMC)

will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion a month.

The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year [Operation Twist], initially at a pace of $45 billion per month….

In particular, the Committee decided to keep [making those purchases] at least as long as the unemployment rate remains above 6½ 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.

In short, the Fed will begin buying new government debt at the rate of $45 billion a month ($540 billion a year) until unemployment drops to 6½ percent, or inflation at the retail level reaches 2½ percent, whichever happens first. Then it will stop.

Bernanke explained that it’s all about creating jobs:

The conditions now prevailing in the job market represent an enormous waste of human and economic potential….

Part of the reason we are engaging in these policies is to try to create a stronger economy, more jobs, so that folks across the country … will have more opportunities to have a better life for themselves.

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