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Fear and the Fed?

The Fed took a look at the economy last week and panicked. In printing industry terms, they increased their run lengths and their page counts, and there's more money printing on the way. It's not much, just $1.4 trillion. What's a few billion dollars amongst friends?

Monday, September 17, 2012

Last Thursday, Ben Bernanke announced that the Federal Reserve would be buying $40 billion in mortgage securities every month for about three years. Do the math: $40 billion x 36 months = something with lots zeros. Stimulate the economy? Just send me a check. I'll be sure to spend it on a new house. I've got other ideas, too.

I'd like to think that the Fed analyzes these things seriously and with great deliberation. Assuming that's the case, I suspect this is what they saw that led them to this decision:

The Fed has very few tools to use, other than to manipulate interest rates and the value of the dollar. (Where's the Congressional outrage about currency manipulation? Oh that's right, we just have a proactive monetary policy. There's no manipulation going on here.)

Or, they could have just panicked because things are not improving after the drastic changes to their balance sheet that they have been maintaining. Their balance sheet, as tracked by the St. Louis Federal Reserve Monetary Base, is about to expand some more.


The QE3 initiative will purchase $40 billion in securities every month for three years, or more than $1.4 trillion. Some of the purchases will replace matured securities, of course (that's been their operating plan for a long time).

As part of its justification, the Fed issued consensus forecasts for key economic measures. The forecasts prove that the Fed can make "hockey stick" forecasts (flat now, but it'll suddenly become great later) just like the rest of us. The table below shows percentage ranges and how they compare to the forecasts made in June:


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About Dr. Joe Webb

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.

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