Unlike previous rounds of quantitative easing, in which the central bank bought a predetermined number of Treasuries, mortgage-backed securities and other assets to flood the financial system with cash, QE3 will go on indefinitely until the economy improves.
The minutes give some insight into what drove Federal Open Market Committee members to push forward with the unprecedented step. It's a daunting list of economic maladies.
- Chronic sluggishness in the U.S. recovery.
- The threat of permanent economic damage from workers losing skills and becoming unemployable as a result of long-term employment.
- A huge drought in the Midwest pushing up food prices and decreasing economic output.
- Despite some progress by European leaders in containing it, economic instability in Europe still threatening to drag the U.S. back into recession.
- Weak economic indicators in developing economies such as China and Mexico.
- The "fiscal cliff" in the U.S. set to simultaneously raise taxes and cut government spending to a massive degree in January 2013.
- Cutbacks in spending by tax revenue-starved state and local governments.
While the Fed considered each of these potentially dangerous economic factors, the one thing you see mentioned over and over again in the FOMC minutes is the issue of unemployment. After looking at the prospects for economic growth from a number of different angles over many months, it's clear FOMC members just didn't see a path to improvement in the U.S. job market, one of its core commitments, under its previous policy. Despite objections from some FOMC members, who worried sparking runaway price increases with a plan they didn't believe would work, the committee voted to push forward.
They also made a significant tweak to their plans for how Fed rates would look going forward. Not only did they extend the timetable for ultralow low rates to mid-2015, they also intentionally rewrote the language to strike a more optimistic tone:
With regard to the forward guidance, the Committee agreed on an extension through mid-2015, in conjunction with language in the statement indicating that it expects that a highly accommodative stance of policy will remain appropriate for a considerable time after the economic recovery strengthens. That new language was meant to clarify that the maintenance of a very low federal funds rate over that period did not reflect an expectation that the economy would remain weak, but rather reflected the Committee's intention to support a stronger economic recovery.
Taken together, these two big changes in Fed policy look like an all-out effort by the Fed to prevent another recession and get Americans back to work.
What do you think? Did the Fed do the right thing?
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