Monetary policy U. S.

Fed actions today

After the FOMC meeting, the Fed announced that:

1) to begin buy treasury bond of $45 B/month (QE3+), after the Operation Twist is over by year end;

2) to enhance quantitative measures in the “communication tools” by relating accommodative monetary policy with unemployment of 6.5%;

3) to balance the dual mandates of maximize employment and inflation, the Fed will relax the inflation target to 0.5% above its conventional target of 2%.

I predicted correctly item 1) and partially correctly item 3). In my Note in Nov. 29, I predicted that the Fed would enhance QE3 once Operation Twist is over; and in my Note on Nov. 17 I thought the Fed would copy Bank of Canada to adopt inflation control with target of a band 1% – 3% with an interest to relax inflation target.

With respect to item 3), it is clear that the Fed is tilting its policy toward improving employment. I think it might be a little too late in this fourth year of crisis as some of the unemployment have become structural and they are no longer easy to come back to the workforce.

Overall I think the enhanced QE3 will be an accelerator for housing recovery in year ahead. Again if U. S. government could resolve the fiscal cliff, then people will be marching to the shopping mall before Santa coming to the town.

Leave a Reply

Your email address will not be published. Required fields are marked *