On Thursday, Sept. 13, 2012, the central bank of the United States "announced it would buy agency-backed mortgage-backed securities and long-term Treasurys, expanding its balance sheet by around $85 billion a month through the end of the year. But the Fed’s new policy is far more radical than this description might suggest. Several features of the policy mark a stark departure from past practices."
Carney continues, "In the past, when the Fed announced a Large Scale Asset Purchase program — LSAP, in Fed speak — it indicated its maximum size and duration. … But this time, the Fed has explicitly declared that the LSAPs will continue until economic conditions improve. What’s more, the Fed said it would undertake additional LSAPs and employ "other policy tools" so long as the economy is underperforming."
Secondly, "The Fed’s policy is very explicitly tied to the labor market," Carney writes. " ‘If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,’ the Fed said in its official statement. This explicit tying of the LSAP to the labor market is unprecedented."
Finally, Carney notes: "The Fed’s statement was actually pretty upbeat about the economy. … What the Fed did today was announce that its policy was not based on a forecast of things getting worse — but on a desire for things to improve faster. In short, it announced that the central bank intended to change the pace of recovery. This is a bold new world for Fed policy."
The Associated Press wrote yesterday, Sept. 13, 2012, that based upon what the Fed announced, the U.S. stock market soared: "The Dow Jones industrial average spiked more than 200 points and cleared 13,500 for the first time since the beginning of the Great Recession. The average is within 625 points of its all-time high."