Today, Ben Bernanke announced that the Fed would launch another round of $40 billion dollar a month quantitative easing, a decision that analysts expected after his pessimistic appraisal of the recovery in Jackson Hole last week. Bernanke's not only doubling down on quantitative easing, but, unlike in past rounds, the program will be open-ended. The Fed's pledged to continue purchasing until the recovery strengthens.
His decision is a move towards our proposal in Millions to the Middle for a change in Fed policy:
The Federal Reserve should explicitly adopt metrics relating to a high employment-to-population ratio, low numbers of discouraged workers, low numbers of involuntary part-time workers, and a high ratio of job openings to applicants as the basis for monetary policy in the U.S., supplementing its historic focus on inflation rates as the primary object of its attention.
In addition, Bernanke will recommend low rates through 2015, a sign that the Fed recognizes a more pessimistic CBO estimation of long-term growth.
The Fed statement:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.
The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.
These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
After word of the decision, stocks have surged, helping to dispel the persistent fable that monetary stimulus spending hurts the investing class.
Both declining wages and high unemployment demand that federal actors, including the Fed, much more aggressively pursue full employment. There's still more the Fed could do to better address the needs of the labor market (again, see our report) and improve clarity about the length of th program, but after discouraging news from Congress, QE3 is progress for the struggling middle-class. Finally, the right direction.