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The Fed Steps on the Gas Again

The Federal Reserve continued to pull all the stops at the FOMC meeting last week. The committee ventured further into uncharted territory with the decision to tie interest rate policy to the unemployment rate and inflation.

At its last meeting, the Fed said that it would hold interest rates at record lows at “least through mid-2015”. But now it plans to keep interest rates at record lows “at least as long” as the unemployment rate is over 6.5%, and inflation projections are below 2.5%, marking the first time interest rates have been explicitly linked to economic thresholds.

And the Fed doesn’t see the jobless rate falling below the 6.5% goal until 2015.

The money printing will continue, as the committee expanded its stimulus measures with plans to buy $45 billion in Treasuries every month, on top of the $40 billion in mortgage-backed securities it is already buying each month. That means the Fed’s balance sheet – which stands at $2.8 trillion – will reach close to $4 trillion by the end of next year. In 2007, it was $869 billion.

The Fed is making itself very clear: it has no plans to hit the brakes too soon. It’s focusing intently on jobs when it makes policy decisions. And it is willing to accept some unintended consequences along the way (like inflation) to juice the economy.


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