There is nothing more frightening than when those in charge of the economy miss something that was as plain as the nose on your face. Such was the situation with the Federal Reserve and the subprime mortgage crisis in 2007. The FOMC met on August 7th and claimed there was not enough evidence of a subprime problem.
The FOMC just did a great thing. The Federal Reserve tied interest rates and quantitative easing to U.S. labor. The messaging alone is powerful. The Federal Reserve is saying, very clearly, U.S. workers matter. Businesses need to start hiring and increasing wages if they want to actually improve the overall economy.
About 5 million people—more than 40 percent of the unemployed—have been without a job for six months or more, and millions more who say they would like full-time work have been able to find only part-time employment or have stopped looking entirely. The conditions now prevailing in the job market represent an enormous waste of human and economic potential.
The QE3 has been officially launched today by the Federal Reserve, which has promised to buy $40 billion of asset-backed securities from the market each month, on top of $35 billion per month of Treasury securities it is already buying as part of its program to reinvest proceeds from securities which are maturing in its existing portfolio. If this isn’t enough to excite the animal spirits of the economy, the Fed has put no limit or end-date on QE3, and it has pushed out its promise to keep short term interest rates near zero for at least the next 2-1/2 years.
Why is the Fed buying mortgage-backed securities and not Treasuries, which it bought under QE1 and QE2? In the past fiscal year for the US government, the Fed purchased 77% of all the new debt issued by the Treasury, and because the Fed focused its purchases in the 10 year and beyond maturities, the Fed is bumping up against its self-imposed limit of not owning more than 70% of the outstanding paper in any maturity. The Fed is already close to this limit for maturities clustered around the 10 year mark, and the Fed owns on average 50% of all the outstanding paper in the 10 year to 30 year maturities. As Republicans have made clear in this election year, every Treasury purchased by the Fed is viewed as an attempt to influence the election of Obama, so this is a potent political reason to stay out of this market for the time being.
More quantitative easing is here. The Federal Reserve will increase purchases of mortgage-backed securities and agency debt by $340 billion by December 31st, 2012. From the FOMC statement:
The Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.
The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and 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. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year
More astounding is the promise to continue to make MBS purchases until the employment rate is acceptable.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
For those once again thinking they were getting their crack cocaine, quantitative easing, once again they are disappointed.
The FOMC statement showed no change in policy from the Federal Reserve. For the rest of us, the FOMC statement acknowledges our crappy economy.
Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
Additionally the Fed doesn't expect things to really improve:
Congressman Ron Paul has been after the Federal Reserve for decades. His last great act before retirement, to audit the Fed, just passed the House of Representatives. All but one Republican voted for the bill with Democrats split down the middle. Our more corporate Democrats voted against the bill. Now the Senate has vowed to not take up the bill.
A senior Democratic Senate leadership aide said there are no plans to bring the bill up in the Senate, but didn’t rule out an attempt by Republicans to seek a vote on the measure as part of another piece of legislation. The Senate would be almost certain to defeat it given the Democratic majority in the chamber.
"This bill would instead jeopardize the Fed's independence by subjecting its decisions on interest rates and monetary policy to GAO audit," said House Minority Whip Steny Hoyer (D-Md.). "I agree with [Fed] Chairman [Ben] Bernanke that congressional review of the Fed's monetary policy decisions would be a 'nightmare scenario,' especially judging by the track record of this Congress when it comes to governing effectively.
Federal Reserve Chair Ben Bernanke gave testimony before the Joint Economic Committee and the doves fell from the sky. Bernanke cut short Wall Street's addict like demand for more quantitative easing and instead suggested a host of policies to boost hiring and real economic output.
More-rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions.
In fact, Bernanke suggested the next FOMC meeting discussion question will ask: Will there be enough growth going forward to make material progress on the unemployment rate? This is good, Bernanke realizes the #1 threat to the U.S. economy is the jobs crisis.
The Fed Chair also warned on the ongoing sovereign debt crisis in the Eurozone:
There is nothing more frightening than when those in charge of the economy miss something that was as plain as the nose on your face. Such was the situation with the Federal Reserve and the subprime mortgage crisis in 2007. The FOMC met on August 7th and claimed there was not enough evidence of a subprime problem.
Welcome to the weekly roundup of great articles, facts and figures. These are the weekly finds that made our eyes pop. 
For those once again thinking they were getting their crack cocaine, 
Congressman Ron Paul has been after the Federal Reserve for decades. His last great act before retirement, to audit the Fed, just 
Federal Reserve Chair Ben Bernanke
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