By Steven K. Beckner

WASHINGTON (MNI) – Federal Reserve policymakers moved in dramatic fashion
Wednesday to continue stimulating the struggling U.S. economy into the new year.

It was not your usual sleepy December meeting of the Federal Reserve’s
policymaking Federal Open Market Committee. As expected, the FOMC effectively
expanded its third round of “quantitative easing” to hold down long-term
interest rates.

More surprisingly, at least in terms of timing, the FOMC embarked on an
experiment with numerical thresholds for determining how long it will keep the
overnight federal funds rate near zero.

Whatever happens with the “fiscal cliff,” there will be no monetary cliff.
The FOMC decided to continue Fed buying $85 billion of bonds per month of to
hold down long-term interest rates.

$45 billion per month of Treasury bond purchases under “Operation Twist,”
financed by sales of short-term Treasury securities, had been scheduled to
expire at year-end. Now those will continue in the form of outright purchases,
financed by the creation of new bank reserves.

The Fed will also continue buying $40 billion per month of mortgage backed
securities, also financed by the creation of new money.

If the combined $85 billion of “QE3″ large-scale asset purchases continue
at that pace throughout 2013, the Fed’s balance sheet will expand by more than
$1 trillion to some $4 trillion.

As with past statements, the FOMC made the expanded QE3 operations
open-ended. It said the Fed will continue buying assets at the announced levels,
if not higher, “if the outlook for the labor market does not improve

And in a major departure, the FOMC dropped its calendar date of “mid-2015″
for the timing of anticipated initial funds rate hikes and launched a new
threshold scheme.

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.”

The FOMC statement said it “views these thresholds as consistent with its
earlier date-based guidance.”

Providing additional clarification, the FOMC made clear it won’t be looking
only at the unemployment rate to determine when to tighten monetary policy.

“In determining how long to maintain a highly accommodative stance of
monetary policy, the Committee will also consider other information, including
additional measures of labor market conditions, indicators of inflation
pressures and inflation expectations, and readings on financial developments,”
it said.

And it added, “When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run
goals of maximum employment and inflation of 2%.”

It was known that the FOMC was considering and working toward some system
of thresholds to replace the calendar date in its “forward guidance” on the
funds rate, but the timetable for achieving consensus was in doubt.

In an accompanying statement, the New York Fed said it anticipates that the
average maturity of its Treasury purchases will be “approximately 9 years.”

The FOMC also reiterated that 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.”

And it said that “in January, will resume rolling over maturing Treasury
securities at auction.”

“Taken together, these actions should maintain downward pressure on
longer-term interest rates, support mortgage markets, and help to make broader
financial conditions more accommodative,” it said.

The latter actions will also prevent any passive shrinkage of the balance
sheet that might offset new purchases.

The FOMC did not rule out further expanding the size or changing the
composition of QE3.

–MNI Washington Bureau; tel: +1 202-371-2121; email: