Thursday, September 13, 2012

Economists React: ‘Bold Shift’ in Fed Policy

From Real Time Economics:

Economists and others weigh in on the Federal Reserve’s aggressive new policy action.
Altogether, we interpret today’s action as a bold shift in Fed policy. On the one hand, the committee significantly strengthened its commitment to a low rate environment and embarked on an open-ended purchase program. 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. Whereas with past Fed purchase programs, market participants had fairly concrete knowledge about the total amount of purchases and time horizon over which these purchases would be conducted, the current open-ended purchase program provides less information up front. –Michael Gapen, Barclays

They could well come back and add Treasuries after Operation Twist ends at year end. Here is the key line: “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.” –Jim O’Sullivan, High Frequency Economics