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U.S. Opinions: Bloomberg News

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Fed needs to help get the market’s mind off QE

From an editorial published Wednesday by Bloomberg View:

Markets have developed a fixation with the Federal Reserve’s plans for its bond-purchase program, known as quantitative easing. The Fed should do more to shift their attention to what matters: how it intends to help millions of unemployed Americans get back to work.

The Fed sent a welcome signal Wednesday when it announced that it would keep adding to its giant portfolio of Treasuries and mortgage securities at a rate of $85 billion a month, contrary to expectations that it would start tapering the purchases. Given the recent rise in mortgage rates and deterioration in the economic outlook, it’s important that the Fed let people know it’s still on the case.

Together with the exuberant market reaction, though, the Fed’s move demonstrates a problem: Investors still don’t make a distinction between its plans for bond purchases and its pledge to keep short-term interest rates low until after the economy recovers. In futures markets, for example, the expected date of the Fed’s first increase in its interest-rate target immediately moved out by about a month, even though there was no major change in interest-rate policy.

How can the Fed give companies the confidence they need to hire and invest, and get the market’s mind off tapering? A clue can be found in the economic projections the central bank published together with today’s policy statement. They show that most Fed officials expect their short-term interest-rate target to remain at or below 2 percent at the end of 2016, much lower than their forecast for unemployment suggests it should be. In other words, as Bernanke has said, they’re ready to keep stimulus going for long after the unemployment rate drops below the 6.5 percent threshold they have set for interest-rate increases.

If the Fed wants to make a bold statement, it can take those plans and turn them into a promise: The central bank will keep interest rates below 2 percent until the end of 2016, no matter what happens with jobs or inflation. Such simple, clear policy guidance would help focus the market’s attention and erase employers’ and investors’ concerns that the Fed will reverse course just as the recovery is gaining momentum – worries that the Fed’s changing tapering schedule have only served to encourage.

True, a policy promise would be a risky move.

But given the subdued outlook for inflation, and the threat of permanent economic damage if the recovery weakens, it’s a risk worth taking.

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