Federal Reserve Chair Ben Bernacke announced that the Fed will begin a third round of "quantitative easing." This means that they will purchase bonds (mortgage bonds specifically) in the open market in order to keep interest rates low - the theory being that doing so boosts the economy by making it cheaper for people to borrow money.
They also announced a change in priorities. Among the goals of the Fed is to maintain stable inflation rates and help attain maximum employment. These goals can conflict, so a choice generally has to be made, and usually the Fed has looked primarily at maintaining law interest rates. In their announcement they suggested that they will now begin to also look at the unemployment rate and try to reduce it.
From the NYT:
The Federal Reserve opened a new chapter Thursday in its efforts to stimulate the economy, saying that it intends to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially.
This is the first time that the Fed has tied the duration of an aid program to its economic objectives. And, in announcing the change, the central bank made clear that its primary reason was not a deterioration in its economic outlook, but a determination to respond more forcefully — in effect, an acknowledgment that its incremental approach until now had been flawed.
The concern about unemployment also reflects a significant shift in the priorities of the nation’s central bank, which has long focused on inflation. Inflation is now running below the Fed’s 2 percent annual target. But with the unemployment rate above 8 percent, the Fed’s policy-making committee suggested Thursday that it might tolerate a period of somewhat higher inflation, promising to maintain stimulus efforts “for a considerable time after the economic recovery strengthens.”
Click here for:
- The press release announcing the decision.
- Story from Bloomberg.
- Quantitative Easing and Bank Lending.
- QE1: financial crisis timeline.
- QE2 was a bust.
