The FOMC announces QE III !*
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. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
As Angrybear readers know, I consider the phrase “mortgage-backed securities” by far the most important part of the announcement. I feared that they would compromise again and implement QE III but base it on purchases of long term Treasuries.
My inner weasel notes that this is still not the Gagnon proposal (as amplified beyond all political possibility by yours truly). I would advocate the purchase of all newly issued agency MBS. That would be on the order of $100 billion a month (if the effort was a total failure and didn’t cause higher agency issue of MBS) to maybe $200 billion and month in my wildest dreams.** So if this doesn’t work, you can’t say I was wrong.
* Note the English are only up to QE II and the Scots still on QE I, so they are way behind.
* last night said dreams included 19 running out of gas on a mountain road, putting the car in neutral by accident and falling over a cliff to my relief as it beat blocking traffic and hearing Italian curses for hours and 2) hearing that Andrei Shleifer had taken over Harvard University in a faculty coup. Plus a nightmare about not having enough time to pack in order to catch a plane that was really scary.