United States Monetary Policy

United States

Fed sets another round of quantitative easing

At its latest meeting held on 3 November, the Federal Open Market Committee (FOMC) decided to embark on a second round of quantitative easing ? commonly dubbed ?QE2? ? by purchasing a further USD 600 billion of longer-term Treasury securities until June 2011, which is equivalent to a pace of USD 75 billion per month. The FOMC also reiterated its commitment to maintain the existing policy of reinvesting principal payments from its securities holdings. Together, the two measures will result in overall purchases of nearly USD 900 billion between now and the second quarter of 2011. In addition, the FOMC stated that the ?Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability?, suggesting that QE2 could last well beyond June next year, perhaps extending until 2012. The FOMC also decided to keep the federal funds rate at the historically low range of 0% to 0.25% set in December 2008, in a decision expected by the market. As economic activity remains weak, with dire labour market conditions and substantial slack capacity, the federal funds rate will remain at ?exceptionally low levels for an extended period?, with the duration of the QE2 programme indicating that there would be no rate hikes before June 2011. For the seventh consecutive meeting, Federal Reserve Bank of Kansas City President Thomas Hoenig dissented, arguing that this continued high level of monetary accommodation could lead to future imbalances that would undermine stable growth in the long term. Consensus Forecast participants expect federal funds rate to remain at the historic low range of 0% to 0.25% by the end of 2010. For next year, the majority of panellists revised their forecasts and anticipate no rate hikes until December 2011, resulting in an average rate of 0.27%.

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