The U.S. Federal Reserve said within the past hour that it would launch a major new round of bond-buying, thereby extending the monetary assistance that it has given to the unimposing economic recovery since the financial crisis began in the wake of the rupture of the housing bubble in 2008.
Specifically, and after months of broadly hinting that it would inject further stimulus into the economy, the Fed's policy-making committee, or the FOMC, has said that it would buy $40 billion of agency mortgage backed securities a month on an open-ended basis. It also said that it was prepared to launch additional efforts as a means to improve the still-flagging employment outlook, as needed.
The Fed additionally said that it would extend its so-called Operation Twist, a maneuver in which it sells short-term fixed-income securities and buys longer-dated issues, in an effort to bring down long-term bond yields. Such bond yields are a pivotal factor in gauging consumer and business purchases--including those in the now-recovering housing market.
Meanwhile, the Fed would seem to have some reason for its move, as the jobs market and the employment recovery remain much understated. For example, in August, non-farm payrolls increased by just 63,000--or about a third of the rate needed to bring down the unemployment rate, which is stubbornly staying above 8%. In August, the rate of joblessness came in at 8.1%. True, that was below the July level of 8.3%, but this reduction was occasioned by the fact that many of those who are unemployed have simply left the labor market. Once a person stops activity looking for work, he or she is technically viewed as no longer being among the unemployed.
As for the rest of the economy, the FOMC intoned that household spending had continued to gain, but that business fixed-investment appears to have slowed. Housing, too, is on the mend following years of free fall, while inflation--save for a disquieting report issued earlier this morning on producer prices--remains largely subdued. Also, longer-term inflation expectations are still modest. Thus, the central bank would seem to have the leeway necessary to undertake this further endeavor, which does come with some risks, in particular on the inflation front down the road.
In addition to aforementioned new bond buying and the continuation of the so-called Operation Twist program, the lead bank also affirmed that it intends to keep interest rates at their historically low levels until mid-2015. Heretofore, the Fed had used 2014 as the likely termination date for such monetary accommodation. This date extension, along with the bond buying increase, suggests that the bank is very nervous about the economy--in particular the vexing unemployment problem, and with some reason. Looked at on the whole, the Fed action is a positive for the economy and the stock market--at least in the short term--although it carries risks over an extended time period. But it is a risk that Fed Chairman Bernanke feels is clearly worth taking at this juncture.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.