The Federal Reserve Board has made the decision to expand its stimulus program. I know the $45 billion a month sounds familiar, but under Operation Twist, short-term securities were sold and long-term securities in the amount of $45 billion were bought. The short-term securities are gone, so now the Fed is just going to buy $45 billion in treasuries each month.
The obvious hope is that it will stimulate the economy. I don’t believe it will. Interest rates will stay low, for sure; but will the financial institutions who receive the cash pump that cash into the economy through business and consumer loans? They have not yet, and I don’t expect them to now. The bottom line is that the money will keep interest rates low for those who qualify and can actually borrow the money.
The $45 billion may eventually become quite inflationary, but we can talk more about that sometime later. For now, I would like to compliment the Fed for tying the stimulus package to reality and not to the calendar. Their decision to keep the stimulus spending in place into 2015 was ill-founded.
The new strategy calls for an end to the spending when the unemployment rate falls to 6.5%. That won’t be anytime soon. The other trigger is when the rate of inflation moves up to 2.5%. If you are going to engage in stimulus spending, this at least provides for a good braking mechanism as it keeps a watchful eye on the inflation pressure gauge.