The statement following the Federal Reserve Board’s FOMC meeting on September 21 downgraded the assessment of the economic recovery, dropping references to temporary factors undermining a more robust recovery (i.e., supply disruptions from Japan), and upgraded the downside risks to the outlook, referring to strains in global financial markets (i.e., the ever illusive solution to the ongoing European sovereign debt crisis).
This set the stage for announcing the “Maturity Extension Program and Reinvestment Policy,” an unconventional policy to “put downward pressure on longer-term interest rates” to “provide additional stimulus to support the economic recovery.”
The Fed will sell $400 billion of short term Treasury securities and buy the same amount of longer-term Treasury securities to lower long term rates without increasing the size of the Fed’s portfolio.
The effectiveness of this policy is an open question. The fact that rates are already at historic lows and the recovery remains weak suggests that rates may not be the issue. Tight lending standards and low levels of business and consumer confidence are more likely factors keeping the supply of and demand for loans low despite the low rates.
That being the case we see only marginal impacts from this latest move by the Fed.