As widely expected, the Federal Reserve Open Market Committee (FOMC) announced Wednesday afternoon that it would further loosen monetary policy. It will purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. Fed officials hope that this will help it accomplish its dual mandate of fostering maximum employment and price stability.
Today's announcement is almost anticlimactic, as committee members had largely prepared the market for this policy change over the past month. They worry that unemployment is too high and that inflation is too low. As a result, they feel that additional money in the system could help put positive pressure on each of these economic variables.
The $600 billion in announced purchases comes in at the low end of what the market might have liked to see. It's certainly not a shock and awe campaign, which would have been something like $1 trillion or more in asset purchases. Instead, the Fed will slowly purchase $75 billion per month in securities through June. It will, however, be monitoring the economy and could alter the size of its purchases in either directions based on new information. Clearly, committee members want to maintain flexibility, just in case.
Although the market might not be thrilled with this announcement, committing to more could have been risky. If the economy begins to improve more quickly than the Fed anticipates, then the central bank could have trouble removing excess money from the system quickly enough, and high inflation could result. Consequently, a prudent approach makes sense.
Indeed, this is the reason why Kansas City Fed President Thomas Hoenig remains the sole dissenter. He believes the risks of additional purchases outweigh the benefits. He worries about financial imbalances and longer-term high inflation resulting.
There was little else to note in today's announcement. Essentially, the Fed wants the pace of the recovery to strengthen and hopes lower longer-term interest rates triggered by more asset purchases will help.