THE FEDERAL Reserve has launched a last-ditch effort to shore up the US economic recovery with a fresh round of quantitative easing – nicknamed QE2 – under which it will buy $600 billion (€425 billion) of longer-term treasury bonds by the middle of next year.
However, in a move that is likely to disappoint markets, the Fed gave no signal about whether it would expand its asset purchases beyond that number.
“The committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase programme in light of incoming information and will adjust the programme as needed to best foster maximum employment and price stability,” said the statement from the rate-setting Federal Open Market Committee.
The start of QE2 is one of the most significant decisions that the Federal Reserve has made in years.
The move is probably the last chance to boost economic growth and cut America’s 9.6 per cent unemployment rate. It is the first time the Fed has used QE as a regular tool of monetary policy, putting its credibility and that of chairman Ben Bernanke on the line.
The $600 billion initial size of QE2 is a little larger than most market expectations but the Fed’s speed of buying, at about $75 billion a month, is a little slower than previously thought. It will continue to reinvest early repayments from its portfolio of mortgage-backed securities.
The greatest surprise in the statement was the Fed’s decision not to signal further asset purchases once the initial programme ends. That suggests that the ultimate size of QE2 may end up being smaller than markets had hoped.
The committee voted in favour of the move by 10-1. The only dissenter was Thomas Hoenig, president of the Kansas City Fed, who “was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances”. – (Copyright The Financial Times Limited 2010)
