Chairman Ben Bernanke has driven the Fed through an exceptional period of cash creation and quantitative easing (QE), regularly speaking of the dangers to American society from stubbornly high joblessness.
And with President Barack Obama – a supporter of Bernanke – back in the White House for a second term, the Fed chief is continuing to steer the central bank in a dovish direction.
Historically low interest rates of between zero and 0.25 per cent will be anchored down “at least as long as the unemployment rate remains above 6.5 per cent,” the Fed’s Open Market Committee (FOMC) said.
Unemployment in the US currently stands at 7.7 per cent.
The holding down of interest rates is also conditional on the Fed expecting inflation to be no higher than 2.5 per cent, one to two years into the future.
Only one of the dozen voters on the FOMC – Jeffrey Lacker – dissented against the action. Lacker was also alone in opposing the Fed’s bolstered asset purchasing programme. In recent months the Fed has been purchasing $45bn in long-term Treasury securities, funded by selling shorter-term securities – a programme dubbed Operation Twist.
And yesterday it announced that it will continue with these purchases, despite running out of short-term paper to sell. The purchases will therefore see the Fed significantly expand its balance sheet.
The move will effectively double the pace of QE, as the $45bn will come on top of the $40bn in mortgage backed securities the Fed is already buying each month.
“This is a very aggressive approach and helps to explain why very long-term Treasury yields and the dollar immediately declined on the news,” said Paul Ashworth of Capital Economics.