The Federal Reserve Pushes Limits of Easing: Will it Work?

Diane Swonk explains the nuts and bolts of QE3

CHICAGO--(BUSINESS WIRE)--In the September issue of Themes on the Economy^®, Chief Economist Diane Swonk breaks down the details of new economic stimulus (QE3) announced by the Federal Reserve. She explains why Fed officials decided to focus on housing by buying $40 billion a month of mortgage-backed securities (MBS); the strategy “allows the Fed to better target support for the housing market, a critical job-creator.” New policy also puts the probable end-date on near-zero interest rates back to mid-2015, more than two years from now. That “offers some reassurance to investors... that they will have more time to reap the returns of those investments, by not taking the punch bowl away from the party too soon.” Read this month's issue, or watch a video presentation.

“The Fed might have a hard time tightening when it needs to, if the assets on its balance sheet have to be sold quickly and at a loss.”

“This open-ended approach to easing, contingent on an improvement in the labor market, has never been done,” Swonk notes. The times are unusual, as indicated by the headwinds still facing the U.S. economy: the federal government’s fiscal cliff, uncertainty in Europe, instability in the Middle East and contractions in state and local government.

Critics of quantitative easing ask why the Fed should act. Our chief economist points to the legal mandate, requiring the Federal Reserve to address both employment and inflation. But there are risks. Swonk warns that, “An excessive expansion in the Fed’s balance sheet could trigger new imbalances and bubbles that would need to be burst and dealt with just as the economy is healing.” Others worry, “The Fed might have a hard time tightening when it needs to, if the assets on its balance sheet have to be sold quickly and at a loss.”

For more on the Federal Reserve’s challenges in balancing persistently high unemployment with stable inflation, read this month's issue of Themes on the Economy^®. Archived issues can be found at mesirowfinancial.com.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Celebrating its 75th anniversary this year, the firm remains independent and employee-owned, with approximately 1,200 employees globally. With expertise in Investment Management, Global Markets, Insurance Services and Consulting, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit its website at mesirowfinancial.com.