The Fed (slightly) changes policy

Well, Wednesday was Fed Day, sending most other business news to the back sections and off the home pages. There were a few interesting things to come out of the statement, and the markets seemed to like the news.

Here’s a blog post from the Wall Street Journal outlining some of the statement’s changes:

The statement included two big changes. The first is an announcement that it will replace its Operation Twist program with $45 billion a month in new Treasury purchases, and the second the Fed said it would be willing to accept inflation somewhat higher than its 2% target and will keep rates low until employment falls below 6.5%.

But there are also some other changes in the statement. The Fed adds employment to its assessment of moderate expansion, but maintains that unemployment still is too high. It notes the weather-related disruptions from Hurricane Sandy played a role in some recent weakness. It tweaks its language to note that inflation is running below its longer-run objective.

Now that the FOMC is buying Treasuries outright, it removes a line saying that it could take on “additional asset purchases” is the labor market doesn’t improve. That suggests that though it may tweak the levels of MBS and Treasuries it’s buying, the Fed won’t be purchasing anything else.

In the paragraph where it outlines conditions for raising rates, the Fed also notes that the end of asset purchases doesn’t automatically mean higher rates. In fact, it says that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends.”

And a few more thoughts from the New York Times story:

The Fed also said that it would continue in the new year its monthly purchases of $85 billion in Treasury securities and mortgage-backed securities, the second prong of its efforts to accelerate economic growth by reducing borrowing costs.

The announcements continued a policy shift that began in September, when the central bank first made clear that it was focused on reducing unemployment, ending long decades during which inflation was the Fed’s constant priority.

As in September, the Fed sought to make clear that is not responding to evidence of new economic problems, but instead increasing its efforts to address existing problems that have restrained a recovery for more than three years.

“The committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens,” the Fed’s policy-making committee said in a statement issued after a two-day meeting in Washington.

And from Bloomberg:

Chairman Ben S. Bernanke is using his unlimited authority to buy Treasuries in an unprecedented effort to stoke growth and reduce 7.7 percent unemployment. The Fed acted in its last regular meeting of the year as lawmakers and the Obama administration continue talks to avert more than $600 billion of automatic spending cuts and tax increases that threaten to throw the country into a recession.

Stocks and Treasury yields rose after the statement. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,431.93 at 12:35 p.m. in New York. The yield on the 10-year Treasury note was 1.69 percent, compared with 1.66 percent late yesterday.

The buying announced today will be in addition to $40 billion a month of mortgage-debt purchases. The FOMC said asset buying will continue “if the outlook for the labor market does not improve substantially.”

Before the announcement, the WSJ had an interesting story about Central Bank officials from all over the globe meeting to talk monetary policy that’s definitely worth a read.

Of late, these secret talks have focused on global economic troubles and the aggressive measures by central banks to manage their national economies. Since 2007, central banks have flooded the world financial system with more than $11 trillion. Faced with weak recoveries and Europe’s churning economic problems, the effort has accelerated. The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.

Their monetary strategy isn’t found in standard textbooks. The central bankers are, in effect, conducting a high-stakes experiment, drawing in part on academic work by some of the men who studied and taught at the Massachusetts Institute of Technology in the 1970s and 1980s.

While many national governments, including the U.S., have failed to agree on fiscal policy—how best to balance tax revenues with spending during slow growth—the central bankers have forged their own path, independent of voters and politicians, bound by frequent conversations and relationships stretching back to university days.

If the central bankers are correct, they will help the world economy avoid prolonged stagnation and a repeat of central banking mistakes in the 1930s. If they are wrong, they could kindle inflation or sow the seeds of another financial crisis. Failure also could lead to new restrictions on the power and independence of central banks, tools deemed crucial in such emergencies as the 2008-2009 financial crisis.

 Well, thank goodness the central bankers are cooperating on fiscal policy. Now if we could only get our own government on the same track.