WASHINGTON — Federal Reserve policymakers moved in dramatic fashion Wednesday to continue stimulating the struggling U.S. economy into the new year.
It was not your usual sleepy December meeting of the Federal Reserve's policymaking Federal Open Market Committee. As expected, the FOMC effectively expanded its third round of "quantitative easing" to hold down long-term interest rates.
More surprisingly, at least in terms of timing, the FOMC embarked on an experiment with numerical thresholds for determining how long it will keep the overnight federal funds rate near zero.
Whatever happens with the "fiscal cliff," there will be no monetary cliff. The FOMC decided to continue Fed buying $85 billion of bonds per month of to hold down long-term interest rates.
$45 billion per month of Treasury bond purchases under "Operation Twist," financed by sales of short-term Treasury securities, had been scheduled to expire at year-end. Now those will continue in the form of outright purchases, financed by the creation of new bank reserves.
The Fed will also continue buying $40 billion per month of mortgage backed securities, also financed by the creation of new money.
If the combined $85 billion of "QE3" large-scale asset purchases continue at that pace throughout 2013, the Fed's balance sheet will expand by more than $1 trillion to some $4 trillion.
As with past statements, the FOMC made the expanded QE3 operations open-ended. It said the Fed will continue buying assets at the announced levels, if not higher, "if the outlook for the labor market does not improve substantially."
And in a major departure, the FOMC dropped its calendar date of "mid-2015" for the timing of anticipated initial funds rate hikes and launched a new threshold scheme.
After asserting that it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens," the FOMC said it expects to keep the funds rate in a zero to 25 basis point range "at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."
The FOMC statement said it "views these thresholds as consistent with its earlier date-based guidance."
Providing additional clarification, the FOMC made clear it won't be looking only at the unemployment rate to determine when to tighten monetary policy.
"In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments," it said.
And it added, "When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%."
It was known that the FOMC was considering and working toward some system of thresholds to replace the calendar date in its "forward guidance" on the funds rate, but the timetable for achieving consensus was in doubt.
In an accompanying statement, the New York Fed said it anticipates that the average maturity of its Treasury purchases will be "approximately 9 years."
The FOMC also reiterated that it is "maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities."
And it said that "in January, will resume rolling over maturing Treasury securities at auction."
"Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," it said.
The latter actions will also prevent any passive shrinkage of the balance sheet that might offset new purchases.
The FOMC did not rule out further expanding the size or changing the composition of QE3.
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