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Does global monetary expansion look to be unlimited?

*The Economist, September 13, 2012

The Federal Reserve launches QE3

”Earlier this year, the Federal Reserve reached a crossroads.  It had lowered short-term interest rates to zero and promised to keep them there until 2013, and then 2014.  It had undertaken multiple rounds of bond purchases to lower long-term interest rates.  Yet the recovery was actually losing steam; unemployment had stopped falling.  Was there anything left to try?

The answer, it turns out, is yes.  The Fed made one of its most consequential announcements yet today.  The detailed actions were, in themselves, similar to previous steps: it will buy $40 billion of mortgage backed securities per month, and extend the period of short-term rates near zero until at least mid-2015.  But the game changer was what it said: it will keep buying bonds until, and beyond, when the recovery is firmly established.  Specifically, the Federal Open Market Committee said in its statement:

‘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 . . .  [A] highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.’

There are two key innovations here, both aimed at altering expectations.  First is the commitment to open-ended bond purchases.  Last week, the European Central Bank put its unlimited capacity to print money to bear on the euro crisis by promising to buying peripheral country bonds with no ‘ex ante quantitative limit.’  The Fed has done the same thing, though in the cause of boosting output rather than saving the euro.  Do not underestimate the psychological impact on investors of ‘unlimited.’ ”


*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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