In a move that caught some economists off guard, the Fed has announced
that it's holding on to assets in its unusually extensive balance sheet. As the
New York Times explains,
"Rather than letting some of the Fed’s more aggressive policy
initiatives end as planned, the committee decided to keep pumping money
into the economy by investing in longer-maturity debt." What does this
say about the Fed's perception of the U.S. economy? Business writers and
economics bloggers parse the details:
- So What's Happening Here? The Washington Post's Ezra Klein explains: "The Fed will hold rather than gradually reduce the amount of assets it owns in order to kickstart what it views as a faltering recovery. This, in Fed lingo, is 'mild easing,' and the markets were cheered by it because it means the Fed is probably willing to intervene if things get worse. But so far as it's actual economic impact goes, it's not going to mean much: The Fed will do more by not doing less. It's like watching Yoda intervene in the economy."
- The Fed Is Pessimistic About the Economy, writes Dan Indiviglio: "The recovery has stalled. That's the message from the Federal Reserve's monthly Open Market Committee (FOMC) meeting. Its economists must be very worried about a double dip. Rather than maintain a stay-the-course strategy under the assumption of a slow recovery, they have decided to further loosen monetary policy. The Fed will reinvest the principal it obtains from its maturing mortgage-related securities and Treasuries in longer-term Treasury securities. This shows that the FOMC is very concerned about the U.S. economy, as it attempts to now keep down longer-term interest rates."
- A 'Very Strange Decision,' writes Paul Krugmanin The New York Times: "The Fed’s current policy is grossly inadequate, logically bizarre, and slightly — but only slightly — encouraging... Rather than allowing its balance sheet to shrink as the mortgage-backed securities it owns mature, it will maintain the balance sheet’s size by reinvesting the proceeds in long-term government bonds. Roughly speaking, it has gone from a completely crazy policy of monetary tightening in the face of massive unemployment and incipient deflation, to a policy of standing pat in the face of same. Whoopee."
- The Fed Has No More Options, writes Felix Salmon at Reuters: "The bigger picture... is one of the Fed largely having run out of ammunition. Most of what it’s doing now is symbolic: the real national response... needs to come from the government rather than the central bank, and needs to be structural rather than monetary in nature. Given today’s decision, though, we can at least assume that any moves from the White House to try to bolster the national economy will be met with the strong support of Ben Bernanke."
- The Move Comes With Risks, writes Michael Derby at The Wall Street Journal: "There had been widespread anticipation the Fed would on Tuesday take additional steps to support economic growth in the face of a faltering economy. Central bankers, however, face few good options for providing new assistance, and its decision to keep the portfolio’s size stable comes with considerable risk. There are real questions about the economic impact of the action, given that long-term borrowing rates are already at historic lows, amid continued bank reluctance to lend."
- Don't Expect Things to Get Any Better, writes Mohamed El-Erian at the Financial Times: "Pending a change in policy mix which is anchored by meaningful structural policies, the equity market is unlikely to sustainably regain its composure and yield levels will continue to surprise on the downside. More importantly, Americans will continue to suffer in large numbers and for longer."