Counterparties: The Fed’s bottomless punch bowl

September 13, 2012

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The Federal Reserve today announced a third round of monetary stimulus, aka QE3, aimed rather directly at the housing market: the Fed will buy $40 billion of mortgage-backed securities a month indefinitely.

The Fed wants to lower yields on mortgage-backed securities and thereby lower mortgage rates for consumers. This is pretty darn close to “Uncle Ben’s Crazy Housing Sale” that Ezra Klein called for back in July. As the NYT’s Binyamin Appelbaum notes, QE3 has an open-ended timeline and variable targets: the Fed will buy mortgage-backed securities “until the outlook for the labor market improves”. For a close look at exactly what changed since the last Fed statement, the WSJ’s Phil Izzo has the tracked changes, which are significant.

The Fed says that its “highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens”. This, as Felix notes, is a big departure:

The job of monetary policy, in the famous words of Fed chairman William McChesney Martin, is “to take away the punch bowl just as the party gets going”. The Fed, here, is essentially disowning Martin, and saying that they’ll keep refilling that punch bowl with high-grade hooch even after the party is getting going.

Will it work in stimulating growth? Markets approved. Longer term, the picture is murkier. Matt Yglesias thinks the message that the Fed will keep rates low through a recovery is more important than the dollar figure. Tim Duy said before the announcement that the message would be more important than QE3 itself. In term’s of the policy itself, Mohamed El-Erian thinks the Fed is stuck in “policy purgatory: incapable of delivering the good economic outcomes it desires, yet unable to exit from an experimental policy stance that risks a widening array of collateral damage and unintended consequences“. — Ben Walsh

On to today’s links:

Why we need to worry that the US economy is very close to “stall speed” – FT Alphaville

The iPhone 5 is the greatest phone in the world, as well as cruelly boring and utterly amazing – Wired

AIG is taking steps to avoid the Volcker Rule – Dealbook

The mystery of why fewer women are looking for jobs – Matt Yglesias 
What official poverty rates miss: Widespread consumption inequality – Conversable Economist

European banks just won’t stop palling around with Iran – WSJ

Bright Spots
The good news from a bad Census report: Obamacare is working – Mother Jones

Bad News
28% of US households conduct “financial transactions outside the mainstream banking system” – FDIC

How the government helps homebuyers in America’s richest communities – Reuters

Full transcript of Ray Dalio’s interview – CFR

New Normal 
Non-shocking correlation of the day: fewer good jobs means more income inequality – The New Republic

“We do believe we are currently in a recession,” says guy nobody believes – Business Insider



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