Depending on who you listen to Federal Reserve policymakers either gave
Wall Street a big Christmas gift or just of lump coal in its stocking at their
final Federal Open Market Committee meeting of 2012.

As MNI anticipated, the FOMC fully replaced the $45 billion of expiring
“Operation Twist” Treasury bond purchases, financed by sales of short-term
Treasuries, with outright purchases of the same amount, financed by creation of
new bank reserves. When added to the $40 billion per month of mortgage backed
securities it has been buying since September, that means the Fed will be doing
$85 billion per month of “quantitative easing” indefinitely in 2013. At that
pace, the Fed’s balance sheet will grow from around $3 trillion to some $4
trillion.

In the mind of officials like St. Louis Federal Reserve Bank President
James Bullard, the replacement of Twist purchases with outright purchases of
Treasuries and the effective expansion of QE3 amounts to a significant easing of
monetary policy. To have kept the level of accommodation the same, the FOMC
should only have authorized $65 billion in total purchases, according to the
calculations of Bullard, who will be an FOMC voter next year.

Not according to Bernanke, however. To him, what matters is the total
amount of bonds purchased, however financed. “I think this is really a
continuation of what we said in September,” he said. “I don’t think relative to
what we did last month that we’ve added accommodation … . The amount of
stimulus is more or less the same.”

Still others, undoubtedly, would like to see larger asset purchases — or a
different composition of asset purchases. And they may eventually get their way.

In keeping with the FOMC’s renewed pledge to keep buying assets until it
sees “substantial” improvement in labor market conditions, Bernanke said the
Fed’s asset purchases going forward will be “flexible.” If the economy proves
stronger than expected in the FOMC’s latest, not-so-cheerful forecasts, the Fed
could scale back the purchases from $85 billion. If it does worse, Bernanke said
the Fed could buy more, although he said “there are limits” to what the Fed can
hope to accomplish.

The FOMC has been working assiduously on a new communications strategy, and
there was a growing consensus in favor of abandoning the use of a calendar date
for signaling the start of monetary tightening, but it was somewhat of a
surprising when the FOMC announced new numerical thresholds for the first time
Dec. 12.

But Bernanke said the FOMC was “ready to go” and so proceeded with the
new-fangled “forward guidance” in the interest of greater “transparency” and
increasing market “confidence” that the Fed won’t raise rates prematurely.

After asserting that it “expects that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after the asset
purchase program ends and the economic recovery strengthens,” the FOMC said it
expects to keep the funds rate in a zero to 25 basis point range “at least as
long as the unemployment rate remains above 6-1/2 percent, inflation between one
and two years ahead is projected to be no more than a half percentage point
above the Committee’s 2 percent longer-run goal, and longer-term inflation
expectations continue to be well anchored.”

Bernanke stressed that the new thresholds do not represent a monetary
tightening “trigger,” only a starting point for discussion about possible rate
changes. A fall in unemployment below 6.5% would not automatically cause the Fed
to raise rates, especially if inflation was “at or below” the Fed’s 2% long-term
objective, he said. And even when the Fed does begin raising rates it will do so
only “gradually” and after the Fed has finished expanding its balance sheet.

–MNI Washington Bureau; tel: +1 202-371-2121; email: sbeckner@mni-news.com

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