Highly Controversial: QE4

This is the big story over the last two days. Ben Bernanke’s Fed is going to be purchasing an additional $45 billion per month over and above QE3’s $40 billion per month in Mortgage-Backed Securities and also on an open-ended basis while targeting unemployment balanced against inflation both at named levels. This will be done while keeping the Fed’s overnight, interbank interest rate (Fed funds rate) at near zero-bound.

Highly Controversial: QE4The Fed adopted a three-part test for interest rates. Rates will stay low “at least as long” as the jobless rate remains above 6.5 percent; inflation between one and two years ahead is projected to be no more than 2.5 percent…

The Fed’s vote is a victory for the bank’s leading dove, Chicago Fed President Charles Evans, who has been pushing for numerical targets since last year. In a landmark speech in September 2011 he said inflation hawks “would be acting as if their hair was on fire” if inflation got too high. “We should be similarly energized about improving conditions in the labor market,” he said. Bernanke, for one, seems to have his hair on fire. He told reporters that high unemployment is “an enormous waste of human and economic potential.”

Read the whole article (opens in a new tab so you may easily comment here): Why the Doves Rule at Bernankes Fed – Businessweek.

The main arguments against this are 1) that low interest rates hurt fixed-income investors in interest-earning time deposits such as Certificates of Deposit and 2) that the Fed may not be able to unwind all of its Mortgage-Backed Securities purchases in a timely fashion if at all.

We shall have to wait to see who proves the more prescient. It appears though that Ben Bernanke was not prepared to wait for the US Congress to “work out” the fiscal issues. If they do a job that will be good enough for Ben, he can always back off on any of his various QE’s.

Here’s a fairly thorough overview:

The new program comes as a replacement for Operation Twist, in which the Fed exchanges $45 billion in short-term bonds for longer-term bonds each month. That program ends this month.

Fed Adds QE4, Drops Date Guidance

The following is from the Fed itself:

The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.

Press Release, Release Date: December 12, 2012, For immediate release