The US Federal Reserve decided last night to extend its $1.55 trillion programme of quantitative easing in an attempt to rejuvenate an economic recovery that the central bank admitted was turning out "more modest" than it expected.
The interest rate-setting Federal Open Market Committee bowed to calls from across the financial markets to extend its support, saying it would pump new money into the markets at a rate equivalent to about $200bn a year, and it left the duration of its efforts open-ended.
"The pace of recovery in output and employment has slowed in recent months," it said, in a much-studied accompanying statement. "The committee anticipates a gradual return to higher levels of resource utilisation in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated."
Quantitative easing (QE) is the central bank practice of printing new money and using it to buy bonds on the open market. It is designed to push market interest rates lower when traditional tools, such as official interest rates, have been exhausted. The Fed yesterday kept official rates in the rock-bottom range of zero to 0.25 per cent, where they have been since December 2008. It repeated that they would stay "exceptionally low... for an extended period".
Under its QE programme, the Fed has bought $300bn of US treasuries and $1.25 trillion of mortgage-related securities, designed to bring down the cost of borrowing for homebuyers. The total money that the Fed has put to work in the markets declines slowly as those bonds mature – and about $200bn had been expected to mature by the end of this year.
Now, instead, it will reinvest the money from repaid mortgage bonds into the purchase of additional US treasuries, subtly switching the focus of its support for the economy from the housing market to the wider credit markets.
Ben Bernanke, the chairman of the Fed, described the latest policy response as "credit easing", as opposed to quantitative easing. Other economists have described the measure as "QE lite".
Thomas Hoenig, the president of the Fed's Kansas branch, dissented from the decision to extend QE, as he has for several months from the FOMC's promise to keep interest rates at zero for an extended period. He said the recovery was always expected to be modest, and the latest moves were unnecessary.
The US equity market jumped sharply in the minutes following the Fed's decision, and interest rates on a wide variety of bonds fell. The dollar, too, fell.
The intensity of the debate over whether the Fed should resume quantitative easing increased after the July unemployment figures, released last Friday, which showed a 131,000 drop in the number of jobs overall and disappointingly weak hiring by private-sector employers.
The US unemployment rate has fallen only modestly from its recession peak of 10.1 per cent, and now stands at 9.5 per cent.
Earlier yesterday, the latest data on productivity had added to the gloomy prognosis for unemployment. Excluding the agricultural sector, productivity declined at an annual rate of 0.9 per cent in July, the first decline in a year and a half. Economists had expected a modest increase.
"When productivity is high and rising, it suggests firms are doing more with fewer people and suggests some pressure to hire new workers," said Scott Brown, chief economist for Raymond James & Associates. "If it is falling, as in this case, it suggests they don't need as many workers."