Yesterday "Helicopter Ben" Bernanke announced QE3, which is yet another round of quantitative easing. For you ordinary Americans, just in case you are interested, more easing means the Federal Reserve is going to buy more mortgage-backed securities. Interest rates will also be kept near zero until 2015, which guarantees that savers will be crucified punished for not spending their money (or gambling in the markets) until then, if not longer.
In short, those in the Money World are moving your debt around. You might not care about this because your mortgage debt is otherwise unaffected. The idea is to encourage more mortgage debt by keeping interest rates artificially low. In fact, no good case can be made that QE3 will affect ordinary Americans in any significant way outside of higher food and energy prices in the short-term. Crude oil prices are already rising on the news. So are Big Bank stocks. The Big Banks are the ones holding much of your mortgage debt, and some of your debt, which is bundled into mortgage-backed securities, will be sold to the Federal Reserve by the banks at inflated prices.
“Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Futhermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely wouldl run at or below its 2-percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturing of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer term securities by about $85 billion each month through the end of the year, should put downward pressure on longer term interest rates, support mortgage markets, and to help make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
"Continue its purchases..." means the Fed's stimulus efforts are open-ended. Asset purchases will cease only if the jobs picture improves. There will be no QE4 because QE3 will never end.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid 2015.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.
Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and prreferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.”
And from the question and answer session—
QUESTION — Does that mean that your tolerance for inflation will be higher in coming years? If not, what good is that language there? Secondly, stock prices are up today as are prices of oil and gold. Why aren't those part of the reaction to the Fed's acts today?
BERNANKE — Well our policy approach doesn't involve intentionally trying to raise inflation. That's not the objective. The idea is to make sure that we provide enough support that the economy will grow fast enough to bring unemployment down over time. As we look back over the last six months or so, we've seen unemployment at basically the same place it was in January. We've seen not enough jobs growth to bring down the unemployment rate and what we need to see is more progress. And that's what we are looking at. In terms of the mid 2015 date, we think by that point the economy will be recovering ... but if you look at our projections you will see it doesn't involve any inflation. Inflation will still be close to out 2% target.
If inflation goes above our target level, as we talked about our statement in January, we take a balanced approach. We bring inflation back to the target over time, But we do it in a way that takes into account the deviations of both of objectives from their targets.
At another point in the Q&A, Mr. Bernanke appears to endorse asset bubbles (ie. artificially inflated asset prices) as a way to jumpstart the economy.
The tools we have involve affecting financial asset prices. Those are the tools of monetary policy. There are a number of different channels. Mortgage rates, other rates, I mentioned corporate bond rates. Also the prices of various assets. For example, the prices of homes.
To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend. If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase. So house prices [are] one vehicle.
Stock prices – many people own stocks directly or indirectly. The issue here is whether improving asset prices will make people more willing to spend. One of the main concerns that firms have is that there is not enough demand…if people feel their financial position is better they’ll be more likely to spend...
And then there is Bill McBride's Analysis: Bernanke Delivered. Bill is better known as Calculated Risk.
The FOMC delivered everything I expected - and more. This was a very strong move and I suspect many analysts are underestimating the potential positive impact on the economy.
However, as Fed Chairman said, monetary policy is "not a panacea". I do think this will help, but this will not solve the unemployment problem.
QE3 is a "strong move" but it "will not solve the unemployment problem." Fixing the jobs problem forms the entire rationale behind the move. It is time for me to say that Bill, who is otherwise a very nice man, is one of the biggest ass-kissers on this planet. Conventional thinking is his forte, and he's very good at it. No big picture for him! No protestations from him! Naturally, he is very popular as a result.
I will leave any additional response in David Stockman's capable hands. He did the interview below with Aaron Task earlier today before QE3 was announced.
As for Mr. Bernanke, as always, we stand in complete awe of the man. We are humble. We are small, He is Great.
We hang on His every word. We know who runs the show. We know who the Big Cheese is.
We are not fools. We are not deluded. We know full well that Nobody Fucks With The Jesus.
Shut the fuck up, Donnie