- The Progressive Pulse - http://pulse.ncpolicywatch.org -

Fed takes more aggressive posture on economic recovery

In a mostly positive step towards encouraging the nation’s struggling economic recovery, the U.S. Federal Reserve announced a third round of “quantitative easing,” [1] a policy known as QE3designed to expand the availability of credit for business investment and job creation.

Specifically, the Fed announced two key moves geared towards spurring new lending [1]: 1) its intent to purchase an additional $40 billion per month in toxic mortgage assets currently weighing down the books of major institutional banks; and 2) an ongoing commitment to keeping the prime interest rate (the interest charged for over-night inter-institutional lending) at its current, historically low level between 0% and 0.25% indefinitely, and at least through 2015.

The big news—and the big departure from previous rounds of Quantitative Easing—is that the Fed is promising to continue QE3 as long as economically necessary [2]ie, until the recovery fully takes hold in the labor market—instead of simply scheduling it to end by a specific calendar date.  In other words, the Fed is willing to keep interest rates low, move toxic assets off the books of banks, all in an effort to reduce barriers to private lending—the grease needed to stimulate business investment, job creation, and ultimately sustainable and robust economic growth. And it has promised to do so for as long as necessary.

Now, it’s worth expressing a note of caution about this—it assumes that banks will respond to these new policies by increasing lending to credit-starved businesses, and in turn that these businesses will take this new credit and invest it in job creation.  So while this new commitment is encouraging, it’s effectiveness still remains to be seen.