The Fed Steps Up

Five million Americans have been out of work for more than six months. Less than half of the eight million jobs lost during the recession have been restored. In his press conference announcing the latest plan by the Federal Reserve to help improve the U.S. economy, Fed Chairman Ben Bernanke made it clear that the committee’s focus is to generate jobs in this country.

This latest effort by the Fed will buy $40 billion in mortgage-backed securities every month until it sees substantial improvement in the unemployment rate. 

 

[CLICK HERE to view the video, “Press Conference with Chairman of the FOMC, Ben S. Bernanke” at YouTube.com, September 13, 2012.]

 

[CLICK HERE to view an infographic on “How Quantitative Easing Works,” at The Wall Street Journal, September 14, 2012.]

 

A key point in the Fed’s statement was the open-ended nature of the bond purchases – for as long as necessary until there is evidence of “ongoing sustained improvement in the labor market.”  This a significant departure from earlier policies that specified the amount of bonds that would be purchased, and reinforces the committee’s pledge to do whatever it takes for as long as it takes to spur sustained growth in employment.

 

Note, however, that the Federal Reserve has limited tools in its tool chest to impact change in job numbers. In his own words Bernanke admitted, “I want to be clear; while I think we can make a meaningful and significant contribution to reducing this problem, we can’t solve it. We don’t have tools that are strong enough to solve the unemployment problem.”

 

Reactions

Much as Mario Draghi, President of the European Central Bank, announcement last July he would do “whatever it takes” to save the Euro, Bernanke’s words gave an initial positive boost to the market and surprised economists with the boldness of the Fed’s intended moves.

 

Michael Gapen of Barclays observed that, “These moves indicate the accommodation switch has been ‘turned on’ and the data have to tell the committee when to stop.” Joel Naroff of Naroff Economics commented that, “the Fed is admitting that its best bet to improve growth is by continuing to help this [housing] sector. By keeping mortgage rates down, the members are betting that housing starts will accelerate, creating more jobs and income.”

 

[CLICK HERE to read the article “Debt crisis: Mario Draghi pledges to do ‘whatever it takes’ to save euro,” at The Telegraph, July 26, 2012.]

[CLICK HERE to read “Economists React: “Bold Shift in Fed Policy,” at The Wall Street Journal, September 13, 2012.]

 

[CLICK HERE to read the article, “Stocks extend Fed rally,” September 14, 2012.]

 

Please feel free to reach out to us if you have questions about what the Fed’s latest round of QE means for you. We’re happy to look at your portfolio within the context of these moves and consider the best way to position your assets for the foreseeable future.

 

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Source: Woods Blog Old

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