On September 13, the U.S. Federal Reserve Board of Governors announced that the country’s central bank is beginning a new program of asset purchases – dubbed “quantitative easing” by analysts and media commentators – with the goal of fostering an increase in economic activity and employment.
The program will focus on mortgage-backed securities (MBS), with the Fed purchasing $40 billion per month. Reactions from politicians and other public figures have been mixed. Some say they believe the central bank has already overstepped its bounds with earlier easing programs, while others insist that more action is necessary, due to the slow pace of the economic recovery.
In contrast to its previous asset-purchase programs, the Fed has indicated that this time, its commitment to monetary expansion will remain somewhat open-ended.
In a press release announcing the decision, the Board of Governors stated that “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.”
This may be due to decreasing effectiveness of the asset purchases. Testifying in June before a Joint Economic Committee of the U.S. Congress, Federal Reserve Chairman Ben Bernanke admitted that there may be “diminishing returns” as the central bank continues its efforts to stimulate economic growth.
The Fed also announced that the federal funds rate will remain “exceptionally low” – between 0 and 0.25 percent – until at least mid-2015.
It is unclear exactly what effect these actions will have on the economy, but with $40 billion dollars being injected into the system each month, it seems certain that some businesses will see an impact on their operations or outlook.
Companies that are looking to gain insight into how they could be affected may be best served by partnering with a financial project consulting service to analyze areas of concern.