Fed Bombshell Stimulus: Targets 6.5% Unemployment and 2.5% Inflation

     Bombshell is how Talking Points Memo describes it:

     "The Federal Reserve took a genuinely unexpected step Wednesday afternoon when it announced it would significantly enhance its current monetary easing program. The Fed, for the first time, committed to keeping monetary policy loose until the economy crosses precise thresholds — specifically, an unemployment rate below 6.5 percent or a inflation above 2.5 percent."

      "It also upped its monthly asset purchases by spending an additional $45 billion a month on Treasuries."

      "Only one member of the Fed Open Market Committee dissented. The significantly more aggressive policy is designed to provide businesses greater incentive to invest, and comes, perhaps not coincidentally, as Congress nears a deadline past which taxes will increase and spending will be cut to the tune of about $50 billion a month."

      "The Fed’s willingness to pursue a dramatically new policy course comes after the election, before which committee members were much more divided about the direction the Fed should take."

    http://tpmdc.talkingpointsmemo.com/2012/12/fed-announces-bombshell-new-stimulus-policy.php?ref=fpa

    The "bombshell" aspect is not the $45 billion in additional Treasuries the Fed is pledging to purchase-adding this to the $40 billion in mortgage backed bonds the Fed had already been buying. In announcing the new purchases the Fed met-rather than exceeded-expectations. Where the Fed exceeded was its new unemployment and inflation targets, Particularly notable Bernanke's statement that even should unemployment go under 6.5% or inflation above 2.5%, it wouldn''t necessarily mean there'd be any tightening even then.

    http://www.cnbc.com/id/100306053

    So if you wanted the Fed to beat expectations then today's the day for you. This policy is in line with something that a number of people have suggested-notably Chicago Fed President, Charles Evans. It's more explicit than anything we've seen in the past. The reasons are both concern about getting unemployment down and perhaps some worry over the "fiscal cliff."

    At this point the Fed now more biased in favor of easing than it has been in a very long time.

    "The conditions now prevailing in the job market represent an enormous waste of human and economic potential," Bernanke said. "A return to broad-based prosperity will require steady improvement in the job market, which in turn requires stronger economic growth."

    "The easing move comes as the Fed's so-called Operation Twist was winding to a close. The program entailed selling shorter-term debt and buying long-dated securities in an effort to drive down lending rates."

   "While few expected the Fed to move this quickly on adopting official targets for inflation and unemployment, the premise had been floated earlier this year and so while the timing is surprising, the advance in tying these variables to the mast is not," said Andrew Wilkinson, chief economic strategist at Miller Tabak.

     P.S. My laptop has now bit the dust. While I'm scaring up the funds for it I'm relegated to using public library computers again. Hopefully not too long and I'm hoping to continue to post at a healthy clip. If there is any drop-off at any point that's the reason.