The Fed: Targets, Thresholds, Guideposts, and Goals

December 18, 2012

As it is, the economic thresholds are currently equivalent to the recent date guidance (“mid-2015”) and the change in asset purchases is simply an extension of what the Fed decided in September. However, the expected date of policy tightening will depend on how the economy evolves.
-Scott J. Brown, senior vice president and chief economist, Raymond James & Associates

As expected, Federal Open Market Committee announced that purchases of Treasuries will be added to QE3 in 2013 (the Fed will continue to buy $40 billion per month in mortgage-backed securities and $45 billion per month in long-term Treasuries). Fed policymakers also announced threshold guidance on the overnight lending rate, which will make the Fed’s policy intentions clearer, and that’s a good thing.

The Fed’s accommodative policy has two components: asset purchases and forward guidance on the federal funds rate (the overnight lending rate). The Large-Scale Asset Purchase program (LSAP, but commonly referred to as QE3) will be $85 billion per month in 2013 and remains open-ended. The FOMC said that “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 in a context of price stability.” This guidance on QE3 is qualitative; it depends on a general sense of the labor market, not a specific number. The Fed will look at a variety of labor market indicators, while keeping an eye on the inflation outlook.

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