By Brai Odion-Esene
WASHINGTON (MNI) – The announcement of a third round — or expanded
second round — of quantitative easing by the policymaking Federal Open
Market Committee Friday has Fed watchers agreeing the central bank has
now firmly made tackling the nation’s jobs crisis its singular focus,
with the accommodative policy to continue two or three years if there is
no sustained progress.
Given her expectation that the jobless rate will not come down any
time soon, “it looks like these bond purchases are going to continue
into 2014 and maybe longer,” Standard & Poor’s Deputy Chief Economist
Beth Ann Bovino told MNI.
Bovino said the fact the new program is open-ended in nature —
“like they took a page from Draghi” — and is tied to the labor market
“puts the Fed’s mandate on bringing that unemployment rate down.”
Pierpont Securities’ Stephen Stanley wrote in an analysis: “Given
that QE3 (and QE4, QE5, and QE infinity) will have virtually no impact
on the real economy or employment, my guess is that balance sheet
expansion will continue until either there are no securities left to buy
or inflation gets so high that even the doves on the Committee can no
longer ignore it.
“In my view, this is awful policy. But I give them credit for being
aggressive. They may be pursuing a failed strategy, but they sure are
pursuing it with conviction!”
Economists at TD Securities said in an reaction note, “We know the
Fed has one mandate, growth (and if they admitted it the second mandate
is higher inflation), but they are effectively demoting the emphasis on
price stability. Breakevens will move higher on this.”
The FOMC announced it would buy $40 billion each month of agency
mortgage-backed securities on an open-ended basis, and said it could
extend those purchases and buy additional assets if the jobs market
fails to improve.
The Fed also said it would continue a program known as Operation
Twist, under which the central bank has been selling short-term bonds
and using the proceeds to buy longer-term bonds.
Taken together, the Fed will be purchasing $85 billion of
longer-term securities a month through the end of the year. The FOMC
statement said members expect to keep short-term interest rates near
zero until at least mid-2015, beyond their previous estimate of late
“The Committee is concerned that, without further policy
accommodation, economic growth might not be strong enough to generate
sustained improvement in labor market conditions,” the FOMC said.
Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi
UFJ said purchasing $40 billion a month of mortgage-backed securities is
$500 billion a year.
“They tried to put a good spin on the numbers,” he wrote in his
reaction. “QE Twist they agreed to extend through year-end at the June
meeting is $45 billion of “longer-term securities” purchases. Adding
this to the open-ended $40 billion of MBS brings us to $85 billion per
month through the year-end. This just sounds so underwhelming.”
FTN’s Jim Vogel in a note reacting to the announcement, said “$40
billion per month in MBS is a lot of duration out of the market. It’s
not huge, but it will be significant within about 6 weeks.”
He also noted that overseas accounts will be disappointed by the
lack of Treasury buying, “partly because no one appreciates the
long-term impact of Operation Twist.”
Vogel added while investment-grade credit should benefit from Fed
target on MBS, “the open-ended commitment on MBS will be problematic for
the market sooner rather than later.”
Bovino said if the new program had come with a set end date, and
the unemployment rate rose again, the asset purchases would not have had
much of an effect.
Since the Fed is tying the program to program to job market
conditions “means they mean business on improving labor market
However, Bovino said while the Fed’s actions could have some
downside pressure on the unemployment rate — and little bit of upside
pressure on the labor market — there remain a lot of headwinds to the
economy, particularly looming fiscal cliff at the beginning of 2013.
“Even this move might not have much of an impact if everyone is
panicked about if we are going to have more taxes and less spending next
year,” she said.
As for what impact the Fed’s extending its forward guidance out to
mid-2015 will have, Bovino said it will bring down the yield curve,
bringing interest rates down lower than they already are.
And yet, “if you don’t have private demand it’s not going to make
much of a difference is it?” she added.
The level of uncertainty in the U.S. heading into next year, with
businesses and consumers in the dark regarding future fiscal policy,
means many are holding back on spending, Bovino said.
“Whether the Fed makes money, I don’t know if it’s going to get
into people’s hands,” she said.
** MNI Washington Bureau: 202-371-2121 **