Last week the Federal Reserve (FED) ventured even deeper into “extraordinary” realm, and it is quite possible these policies could have some major impacts on the markets as well as day-to-day life in the near future. So listen up.
Yet again, the Federal Reserve Open Market Committee (FOMC) rolled out monetary policy artillery and fired a few shells from their arsenal in the form of Quantitative Easing (QE). Simplistically called by the average investor, “money printing.” Some professional FED policy commentators and investment management professionals that are “in the know” are calling the last FOMC policy meeting statement a “game changer.”
They see the recent announcement as a communication to the market that indicates the FED is ready, willing and able to employ a monetary howitzer.
Simplistic version of FOMC policy statement:
—Low short term rates till 2015.
—Print money to buy $40 billion a month of mortgage-backed bonds (MBS).
—Use the proceeds from interest and maturing bonds that they bought during QuantitatiQE1 and QE2 to buy longer maturity US bonds (Operation Twist extended).
—Amount of purchases open-ended.
What makes this announcement unique is that so unconventional tools were combined into one statement. In other words, FED is going “all in” on reflationary policies.
What they are explicitly attempting to do
The FOMC is trying to use monetary policy to get people to spend their cash and get investors to make riskier decisions in order to “kick start” the economy. The assumption is that their low interest rate policies should discourage saving and increase the frequency in which money is spent domestically or, increase the “velocity of money.”
The monetary policy hope investors will bid up asset prices, more specifically, home prices and European bond prices. Price rises in these assets would hopefully lead to a feeling that the global economy on a more stable footing. The perception of stability becomes more pervasive consumers tend to spend more, hiring increases and capital investment increases. The policies however have not yet worked as unemployment remains stubbornly high so they taking more action.