This is Bernanke's QE3, 4, 5 and 6
The US Federal Reserve has delivered a policy mix that should be cheered from the rooftops as it shows unambiguously its wish and intent to reflate the US economy. With that, the Fed has basically said that it will do whatever it takes to create jobs and drive the unemployment rate lower.
By keeping the bond purchases opened ended, Fed Chairman Ben Bernanke has delivered not only QE3, but simultaneously unleashed QE4, QE5 and QE6. This is QE with no end, or rather an end only when the economy improves.
As part of the open ended nature of the bond purchases, the Fed has committed to buying $40 billion of mortgage backed securities per month. In a Fed first, and this is the highlight of the Fed statement, "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”.
Mr Bernanke even suggested that "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens” (my emphasis).
Rounding out the foot-to-the-accelerator policy announcement, the Fed extended the timeframe that it will keep interest rates near zero through to at least the middle of 2015.
Can anyone now doubt the resolve of the Fed to get the economy growing to the point where unemployment won't fall and house prices won't rise?
These sorts of policies break new ground for the Fed and the US economy. The reason for what is a radical policy change is simple. The US economy is nowhere near fully recovered from the deepest, broadest and most damaging malaise since the 1930s Great Depression. This is revealed most clearly in the labour market which has shown a dumping in participation rate and a run of unemployment data not seen since the 1940s.
Why else would the US Federal Reserve announce a third round of unlimited bond purchases that will be funded by printing money? Why, after almost four years where the Fed has set the policy interest rate near zero, has the Fed been forced to pledge to leave that rate near zero for at least another three years?
These quite radical and unprecedented monetary policy settings are designed to help the US negotiate its way out of what Nobel Laureate Paul Krugman has called the "Lesser Depression”.
"Lesser” seems to be a fair description of the depressed US economy at present. And "lesser” rather than "great” because in this experience, unlike the 1930s, the Federal Reserve acted earlier to slash and then keep interest rates low and has implemented a couple of rounds of quantitative easing. There were also some fiscal measures and nationalization of banks and insurance companies, but that is for another day.
The Fed's decision this morning is a critical next step if the US is to gain sufficient momentum to make meaningful inroads into the spare capacity in product markets generally, and in the depressed labour market specifically.
It is noteworthy that the Fed's decision to leave the bond purchases open ended follows a similar policy from the European Central Bank last week. This thumbs the central bankers' noses at hedge funds and traders around the world. They will not know whether to ever "take on” the Fed or ECB in markets in the same way they might have if there was a defined volume of bond purchases that were getting close to being exhausted.
The Fed and financial markets won't know for some time – perhaps many years – if or how these policies have worked. Most obviously, focusing on results for economic and jobs growth will be the best guide to the potency of these policy moves.
Less obvious, and something the Fed would never admit, is that it would be no bad thing if they saw inflation creep up a bit, at least for the next year or two.
Some inflation would help boost asset prices and housing in particular. A rise in house prices would help lower the bank's loan to valuation exposure in housing, thereby boosting the bank's willingness and ability to increase lending. It would also help homeowners, many of who are still enduring negative equity, to regain previously destroyed wealth and, in time, enhance their ability to spend and borrow.
Unless we see some growth, decent job creation and a bit more inflation, especially in house prices, the Fed will keep printing money, buying bonds and doing whatever it takes to get people into work.