Liveblogging World War II: March 21, 1943
Winston Leonard Spencer Churchill on the Real Moocher Class

Tim Duy: What Fed Policy Is

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Tim Duy:

Fed Checks: A more interesting change can be seen in the Fed's statement regarding the future of the asset purchase program….

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 Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

The addition of the final clause appears to be a bow to policymakers who are concerned that the pace of easing might need to be curtailed in the nearer future…. It appears to give the Fed room to alter the pace of purchases as the unemployment rate tends toward the 6.5 percent threshold even if, for example, jobs continue to grow in the 150k-200k range.   That said, I expect asset purchases to continue at this pace for most of this year (if not into next year).  Moreover, most policymakers expect this as well…. The combination of high unemployment and low inflation argue for sustained easing. Indeed, the combination could argue that policy needs to be even more accommodative… with unemployment this high and inflation this low, the benefits of continued easing exceed any potential costs.  And with this in mind, note that Federal Reserve Chairman Ben Bernanke, in the press conference, stated that he did not see anything unusual in current equity valuations, another indication that he believes that concerns about financial market distortions are overblown.

Bottom Line:  Policy is on hold.  On hold for a long time.  Unless activity accelerates substantially, asset purchases will continue at the current rate through most of this year (if not until well into next year), while short-term interest rates will remain locked down near zero until 2015.  Beware of reading too much into the comments of the more hawkish monetary policymakers; they still represent a minority view.