Economics Web Note

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An aggressive suite of actions

The FOMC took extremely aggressive policy actions today, committing themselves to expanding the Fed's balance sheet until the labor market substantially strengthens and vowing to maintain near-zero rates for a considerable time even after the recovery strengthens. In many ways, today's actions represent the beginning of a new phase in Bernanke's efforts to get the economy moving again. Whereas past actions were, by and large, one-off adrenaline shots, today's actions more fully embraced conditional committment as the guiding principle behind Fed strategy. Sustained improvement in the labor market stood in particularly sharp focus as the condition which would inform the Fed's committment to both balance sheet and interest rate accommodation. To the extent this strategy works, history may look back on Woodford's Jackson Hole advocacy of conditional committment as a turning point in the way the Fed attacked the sluggish recovery. To the extent this strategy doesn't work, at least Bernanke can argue that he threw everything he had at the problem.
On the balance sheet, the Fed initiated agency-MBS purchases to the tune of $40 billion per month, and will continue those purchases until the labor market improves "substantially." If that fails to happen, not only will the Fed continue MBS purchases but it will "undertake additional asset purchases" -- presumably Treasuries after Twist ends -- "and employ its other policy tools as appropriate until such improvement is achieved." Operation Twist was left in place. The low rate guidance was extended through mid-2105, as universally expected. Added to this, however, was a statement that such a highly accommodative stance will remain appropriate for a "considerable time after the economic recovery strengthens." What this means is somewhat vague and open to interpretation -- much like "subtantial" improvement in the labor market -- but the intent is clear. In many ways, today's rate guidance can be seen as a stop on the road to something like the Evan's rule, which more explicitly ties policy to an improvement in the unemployment rate. Indeed, after today the adoption of such a rule in the future looks more likely.
Against the backdrop of such a dramatic shift in the Fed's strategy, the wording of the economic description is bound to play second fiddle. Even so, it is probably worth mentioning that the statement added a sentence that "The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions." underscoring the weakness in the labor market as the justification for the renewed vigor in policy accommodation.

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