Another Monetary Bailout
Yesterday, while US Congressional leaders continued their stand-off, thus further delaying policy changes urgently needed to restore fiscal balance, confidence, and growth in the American economy, the Federal Reserve once again stepped in to do what it can from an increasingly limited set of monetary tools.
Chairman Bernanke announced QE3, a third round of quantitative easing whereby the Fed purchases certain financial assets, in this case mortgage-backed securities, with an objective of lowering mortgage interest rates and thus encouraging early signs of strengthening in the housing market. Such purchases of these, and perhaps other securities like government bonds, will continue indefinitely until there is clear evidence of a sustained downward trend in unemployment. It was also announced that short-term rates will be kept at current, historically-low levels until at least the middle of 2015, thus extending this time horizon from the end of 2014.
Stock markets, perhaps surprised by the degree and scope of the measures, rallied strongly, and may well show further strength when they open Friday morning. This is a similar pattern to that in Europe last week when the European Central Bank announced its own intention to buy the sovereign bonds of countries such as Spain, Italy and Greece ( see my posting of September 8).
In making the announcement yesterday, Chairman Bernanke emphasized that these monetary measures alone, without accompanying fiscal policy changes, cannot be expected to do all that is required. Interest rates have been very low for several years now, yet economic growth has been anemic and unemployment has remained persistently high. As this writer has stressed in several earlier postings, the real policy challenge now is fiscal - to begin to reverse the spiral which has brought total US government debt outstanding to over 100% of GDP. A credible, long-term plan in this regard would be nothing short of an elixir for US and, indeed, world, economic growth.
Action by elected officials - not central bankers - is the missing ingredient.