The Federal Reserve will continue to expand the monetary base by $900 billion a year. This is down from $1 trillion a year, or a reduction of 12%. The announcement triggered an increase in the Dow Jones Industrial Average of 293 points.
The FOMC released a statement, as it always does. This statement removed all threat of any reduction in the policy of monetary inflation. The FED will maintain its “highly accommodative” policy for years. It’s now official.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.
Excuse me? How can a highly accomodative policy continue for a considerable time “after the asset purchase program ends”? Isn’t monetary policy based on asset purchases? No one asked this at the press conference. Someone should have.
This was Fedspeak for “bond market subsidy.” If the statement means anything, it means that the FOMC will start buying short-term T-bills instead of subsidizing Fannie/Freddie mortgages and T-bonds. If it does not mean this, then it is meaningless. But the financial media are content with meaninglessess, as long as continuing FED expansion is now guaranteed.
The phrase “considerable time” means indefinitely. The Committee still will use 6.5 unemployment and 2% CPI inflation as its standards. It will also use unnamed other criteria, which will never be identified in public.
In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.
Translation: “We will continue to make this up as we go along.”
How long will this last?
The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.
Translation: “$900 billion a year is the new normal.”
The Federal Reserve had previously established targets for justifying a reduction: unemployment at 6.5% and an increase in the Consumer Price Index of about 2%. The unemployment rate is 7%. The CPI is flat. So, the only two explicit targets meant exactly nothing. The Federal Open Market Committee reduced the rate of monetary expansion by a token amount. But it made it clear that this token reduction is all the markets need fear.
We can see what the Federal Reserve has done to the monetary base. It has done it in spurts.