Today, the Federal Open Market Committee did what most analysts were expecting and embarked on another round of easing.
“Fed Announces Additional Monetary Stimulus” (MoneyWatch)
The Federal Reserve’s announcement today that is launching a third round of quantitative easing validated widely held expectations that the central bank would provide more monetary stimulus in an effort to speed the economic recovery.
The Fed said it will purchase $40 billion a month in mortgage-backed securities and extended its guidance on interest rates. Rates will stay low through mid 2015 instead of 2014, the bank said. The additional Fed easing, along with its intention to continue reinvesting the proceeds from principal payments from its holdings of financial assets, will increase its inventory of securities by approximately $85 billion each month through the end of the year. These actions, which are more aggressive than many analysts expected, “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative,” according to a Fed statement.
They also reported that they were adjusting their economic outlook:
“Fed Cuts 2012 Growth Forecast, Raises Next 2 Years” (Associated Press)
The Federal Reserve has lowered its growth forecast for this year but is more optimistic about the next two years. The brighter outlook likely reflects a series of bold stimulus measures that the Fed launched Thursday aimed at boosting the sluggish economy.
In its updated forecasts, the Fed said it now expects growth to be no stronger than 2 percent this year. That’s down from June’s forecast for as much as 2.4 percent growth. It’s also not much better than the weak 1.7 percent annual growth rate the government reported for the April-June quarter.
The Fed said it expects growth to accelerate next year to as much as 3 percent, up from its June forecast of as much as 2.8 percent. For 2014, growth will range between 3 percent and 3.8 percent, the Fed predicts.
So, let me get this straight.
On the one hand, the Fed is saying that further monetary accommodation will make a real difference even though the latest Duke University/CFO magazine Global Business Outlook Survey makes it clear that easier money won’t lead businesses to initiate or expand investment plans.
On the other hand, the Fed announced another round of quantitative easing because they believe the economy is not on the right trajectory, and yet they are raising their economic growth estimates for the next two years.
I can’t be only one who thinks there is something wrong with this picture — right?