–Retransmitting Story Headlined 14:16 ET Wednesday

By Steven K. Beckner

WASHINGTON (MNI) – Faced with continued high unemployment and
undesirably low inflation, Federal Reserve policymakers voted Wednesday
to proceed with more “quantitative easing,” but the amount of securities
purchased is less than many on Wall Street had expected and less than
some Fed officials would have supported.

After running out of room to cut the overnight federal funds rate,
the Fed bought more than $1.7 trillion in securities to push down
long-term rates through the end of March. But with the economy still in
the doldrums and inflation running lower than the Fed would like, the
Fed’s policymaking Federal Open Market Committee moved to launch another
round of such “quantitative easing” — popularly known as “QE2.”

The Fed announced that it will buy $600 billion in longer term
Treasury securities with newly created money by the end of the second
quarter of next year or $75 billion per month. It left itself
flexibility to do additional purchases, if deemed necessary, beyond the
middle of 2011.

The New York Fed said its open market trading desk will buy
Treasuries with an average maturity of five to six years.

Together with previously authorized bond purchases to keep the
Fed’s securities portfolio from shrinking, the Fed will be buying up to
$900 billion of securities.

The $600 billion of new monetary stimulus is not as aggressive
as many on Wall Street had hoped for in recent weeks, but evidently
represents a compromise with those who would have preferred no QE2 at
all.

Explaining its decision, the FOMC said consumer spending remains
constrained by high unemployment and other factors, that firms are
reluctant to hire and that housing is still depressed.

There had been some speculation that the FOMC might change its
communications strategy, but apart from the QE2 announcement itself, the
committee retained its long-running commitment to keep the federal funds
rate “exceptionally low … for an extended period.” There was no
mention of a new inflation or price level target, as also rumored.

Having taken the fateful step of injecting vast new sums of
reserves into the banking system to lower long-term rates, boost
inflation expectations and, perhaps, reduce the dollar to more
competitive levels, the FOMC must now wait and watch to see how much its
controversial action actually accomplishes.

Dissenting, Kansas City Fed President Thomas Hoenig contended that
the risks of QE2 outweigh the benefits and warned the Fed is risking
future financial imbalances and higher inflation.

Though Hoenig was the only formal dissenter, there were undoubtedly
other voices of opposition or at least caution.

To approve even a limited version of QE2, the FOMC had to weigh the
costs and benefits, as Chairman Ben Bernanke had said ahead of the
meeting. And the majority no doubt had to overcome ambivalence among
some and fervently expressed doubts among other members — not just
Hoenig, but also Dallas Fed President Richard Fisher, Richmond Fed
President Jeffrey Lacker, Philadelphia Fed President Charles Plosser and
Minneapolis Fed President Narayana Kocherlakota.

In recent weeks there were questions, first of all, about the
efficacy of further asset purchases. Even if it reduces already
historically low long-term interests, QE2 is unlikely to have much
effect on high unemployment in a climate of business uncertainty about
taxes and regulations, opponents contended.

And there were other concerns. QE2, it was alleged, could undermine
the Fed’s credibility and independence; unanchor inflation expectations;
cause disruptive dollar exchange rate movements, and complicate the
Fed’s long-term exit strategy.

Bernanke, New York Fed President William Dudley and other QE2
proponents acknowledged these concerns but argued that the Fed’s
statutory dual mandate to pursue full employment and price stability
practically obligated the central bank to at least make the effort to
use the unconventional tools left to it to boost economic activity and
combat disinflationary tendencies.

That argument ultimately prevailed, but the FOMC did not give
financial markets as much monetary stimulus as some had wanted or
predicted. In the weeks leading up the meeting, expectations for the
amount of security purchases ran as high as $1 trillion or even $2
trillion.

Market News International cautioned against expecting such
aggressive quantitative easing, and more recently, the market consensus
had come down to more modest sums. And indeed, a sharply divided FOMC
agreed upon a far lesser amount, while leaving itself room to do more.

St. Louis Fed James Bullard, an FOMC voter, had recently advocated
an “open-ended” and “flexible” approach to Q.E. in which the FOMC
would approve $100 billion of Treasury purchases between now and the
mid-December FOMC meeting, then reassess whether more or less is needed
based on the complexion of the economic and financial data at that time.

But the FOMC instead followed past practice of announcing a sizable
amount of asset purchases up front.

“To promote a stronger pace of economic recovery and to help ensure
that inflation, over time, is at levels consistent with its mandate, the
Committee decided today to expand its holdings of securities,” the Fed
said in a statement.

“The Committee will maintain its existing policy of reinvesting
principal payments from its securities holdings,” it continued. “In
addition, the Committee intends to purchase a further $600 billion of
longer-term Treasury securities by the end of the second quarter of
2011, a pace of about $75 billion per month.”

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** Market News International Washington Bureau: 202-371-2121 **

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