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HEARD ON THE STREET
Updated June 21, 2012, 11:19 a.m. ET
The Fed's Soft Launch of QE3
By JUSTIN LAHART
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It is unlikely that the Federal Reserve's efforts to boost the economy will end with "Operation Twist."
The Fed's rate-setting committee decided Wednesday to extend its so-called
Twist operations. These involve it selling short-term Treasurys and using the
funds to buy long-dated ones. The goal is to bring down long-term interest
rates.
Associated Press
The extension of Twist assuaged markets, which had expected action along those lines. But the Fed also lowered the bar for further efforts, noting in its statement that it was ready to do more to promote "a stronger economic recovery and sustained improvement in labor market conditions." And, in projections released shortly afterward, the Fed said the central tendency of board members' year-end unemployment estimates ranged from 8% to 8.2%, versus the 7.8% to 8% they expected in April. The unemployment rate last month was 8.2%.
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.So, to sum it up, the Fed wants a better job market. And the Fed doesn't think that the job market is going to show much, if any, improvement through the end of the year.
.Absent a turn for the better between now and the Fed's two-day meeting July 31 and Aug. 1, more action could be in the offing. That would likely involve a third round of quantitative easing, or QE3, involving outright purchases of Treasurys and, especially, mortgage-backed securities.
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The hawks on the Fed will complain, and with rates at rock-bottom levels
already, the efficacy of further action is indeed open to debate. But they are
now more outnumbered than ever. Both new Fed board members—Democratic economist
Jeremy Stein and Republican businessman Jerome Powell—appear to be in Chairman
Ben Bernanke's more dovish camp. Notably, the Fed's projections showed that an
additional two board members don't expect the Fed to tighten policy until
2015. And an about-face would be tricky at this point, since investors now expect
the Fed will do more. QE3 is out of the bottle.
The extension of Twist assuaged markets, which had expected action along those lines. But the Fed also lowered the bar for further efforts, noting in its statement that it was ready to do more to promote "a stronger economic recovery and sustained improvement in labor market conditions." And, in projections released shortly afterward, the Fed said the central tendency of board members' year-end unemployment estimates ranged from 8% to 8.2%, versus the 7.8% to 8% they expected in April. The unemployment rate last month was 8.2%.
.
.So, to sum it up, the Fed wants a better job market. And the Fed doesn't think that the job market is going to show much, if any, improvement through the end of the year.
.Absent a turn for the better between now and the Fed's two-day meeting July 31 and Aug. 1, more action could be in the offing. That would likely involve a third round of quantitative easing, or QE3, involving outright purchases of Treasurys and, especially, mortgage-backed securities.
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Associated Press
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