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:

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6 Responses to Fed to Print $40 Billion (Or More) Per Month Indefinitely

  1. Tim September 13, 2012 at 11:14 AM #

    I’m guessing that, like me, precious metals markets just got around to realizing that the $40 billion per month is likely just the the beginning of QE3 and this was probably the reason for gold and silver prices wavering there for a bit after the initial move higher.

    Now it appears to be onward and upward … amazing!

  2. Ted S. September 13, 2012 at 11:39 AM #

    As the talking heads have been noting over the last hour, the $40 billion figure will include repurchase of maturing MBS under the existing program, so, technically, the Fed won’t be printing another $40 billion per month as you state in the title, but, then what’s $10 or $20 billion a month between friends?

    • Tim September 13, 2012 at 12:33 PM #

      Yeah, I wrote the title first and didn’t really go back to update it after reading the fine print. Ten billion here, twenty billion there, pretty soon you’re talking about real money.

      Just changed it from “$40 Billion More” to “$40 Billion (Or More)”

  3. Steve White September 14, 2012 at 7:00 AM #

    With interest rates now set to stay at zero until mid-2015 and the economy not likely to surge for a very long time, it seems that bond funds will be able to continue to generate returns greater than the ZIRP CDs offered by financial institutions until at least 2015.

    This offers cash savers (who are getting screwed in CDs) an alternative, but, as always, there is the big risk that rates shoot up for some reason. ZIRP is just killing savers and ruining the capital investment base of this country. Moral hazard is ignored.

    I look at Japan’s ZIRP and am amazed it can go on so long (20+ years). This tells me the USA will do the same thing. ZIRP is here to stay for the rest of my life.

  4. Charlie September 18, 2012 at 12:13 PM #

    With the interest rate chart in this article, have you considered changing the name of your blog from “The mess than Greenspen made” to “The bigger mess that Bernanke made.”


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