Unprecedented Insanity – the Fed’s “new” policies

On September 13, 2012, the Fed unveiled its unprecedented plethora of programs that purportedly will spur economic growth via keeping interest rates low.  These “new” programs are similar, if not identical, to the Fed’s prior programs attempted to achieve the same goal with little, if any, positive results.  However, what makes them unprecedented is the combination of (i) the number of programs, and (ii) the extent of the programs (i.e., there is no specified end dates to some programs (they are “open ended”).  The “new” programs include the following:

  1. The Fed will initially be purchasing $40 billion per month of mortgage-backed securities (MBS) until further notice.  This is similar to the Fed’s prior quantitative easing programs (aka “QE1” and “QE2”) except (i) the Fed is purchasing MBS rather than Treasury securities, and (ii) there is no specified time that the program will end.   Many are calling this program “QE3”; however , unlike QE1 and QE2, the Fed placed no dollar or time limit on the program.   Thus, this program is really a “new” unprecedented quantitative easing program that dives the U.S. deeper into unchartered territory.
  2. The Fed extended the period of time that it will maintain interest rates between 0% and 1/4% until mid-2015.  The Fed earlier pledged to keep interest rates at these levels atleast through 2014.
  3. The Fed extended “Operation Twist”, a program initiated approximately one year ago in which the Fed sells shorter-term government debt and purchases longer-term securities.

Despite executing similar, if not identical, programs over the last few years with little, if any, positive results, the Fed continues to believe that somehow continuing these  programs or something similar will stimulate the economy.  According to the Fed’s September 13, 2012 press release,

…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…should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Prior blogs found here and here provide more detail of these prior similar programs and their disappointing results.  So, the insanity (doing the same thing over and over and expecting a different result) continues with even more unprecedented actions taken this week. Whether we like it or not, we are the Fed’s guinea pigs…Most of us will be around to experience the unknown long term (likely negative) consequences of these programs.

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