Fed to Print $40 Billion (Or More) Per Month Indefinitely
Well, it is now clear that we’ve entered a new era of central bank policy making in which money printing in both Europe and the U.S. has become open-ended, today’s policy statement from the FOMC (Federal Open Market Committee) indicating that the Federal Reserve will purchase some $40 billion in mortgage backed securities until such time that the U.S. economy improves (that might be a long time).
The Fed also extended its promise to keep short-term interest rates at their freakishly low level of between 0 and 0.25 percent from late-2014 until mid-2015, a decision that is sure to thrill fixed income investors in the world who have already been locked out of CD rates at or near the rate of inflation for years now.
As shown to the right where the last two Fed rate cutting cycles are compared, we’re now at the five year mark since the Bernanke Fed first began slashing interest rates in 2007, about the same mark where rates had been normalized the last time around.
Moreover, if the current low rates extend into 2015 as promised, that would put us beyond the end of the last rate cut/normalization cycle, more fodder for future monetary historians to be sure.
Probably the most important part of this statement is the following in which money printing in excess of the additional $40 billion per month is threatened:
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.
Not surprisingly, Richmond Fed President Jeffrey Lacker once again dissented from the other 11 voting members of the board and markets seem to be taking the news quite well, stocks moving sharply higher and precious metals surging. Curiously, the U.S. dollar index is unchanged and energy commodities are slightly lower, so, maybe there’s more (or less) here than meets the eye.
As always, the last two Fed policy statements are shown below: