MacroScope

Don’t call it a target: Fed buys wiggle room with qualitative goals

September 19, 2012

U.S. Federal Reserve Chairman Ben Bernanke listens to a question as he addresses U.S. monetary policy with reporters at the Federal Reserve in Washington September 13, 2012. REUTERS-Jonathan Ernst

In a historic shift in the way the Federal Reserve conducts monetary policy, the U.S. central bank last week announced an open-ended quantitative easing program where it has committed to continue buying assets until the country’s employment outlook improves substantially. Bank of America-Merrill Lynch credit analysts captured Wall Street’s reaction:

With an open-ended QE program to buy agency mortgages, and an extremely dovish statement, the Fed managed to provide a positive surprise for a market that was expecting a lot.

The new plan is really not that different from adopting a defacto growth target. Still, given the lack of complete consensus on the matter within the Fed, its Chairman Ben Bernanke was forced to stick with words rather than numbers to convey his message of central bank commitment. From the Federal Open Market Committee Statement:

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.

The reliance on verbal rather than numeric markers has the benefit of giving the Fed leeway to set the goalposts as time evolves, but also potentially the downside of not affecting public sentiment on the recovery forcefully enough to make a tangible difference.

As for whether the renewed focus on mortgage securities would do a whole lot for an incipient housing market rebound, Paul Diggle, property economist for Capital Economics, says don’t expect a sudden boom. That’s because the cost of borrowing isn’t the main impediment to recovery:

The underlying improvement in housing demand is still very reliant on cash buyers and investors.

Ultra-low mortgage rates, which have been with us for several years now, have not been, and in the short-term at least are not going to be, the principal driver of the housing recovery.

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